Last-minute tax planning: Your tax checklist for the financial year-end

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Tax loss harvesting and portfolio rebalancing

Given the bull run in the stock market, it is very likely that you are sitting on handsome gains from your stock and equity mutual fund portfolios. However, there is also a chance that some of the stocks you own are underperforming, currently.

Since you have faith in their long-term potential, you want to hold them. In such cases, you can tap tax loss harvesting as a strategy. It is a necessary and important tool to rebalance your portfolio.

Just like farmers harvest crops, when it comes to investing, tax-loss harvesting lets you offset your tax liability by selling off shares or mutual funds at a loss. Typically, such investments are purchased again to maintain the same asset allocation or portfolio.

How it works

Here is an example of an effective tax-harvesting strategy. Let’s say you invested Rs 6 lakh in listed shares and Rs 3 lakh in equity-oriented mutual funds in April 2020. Now, the value of the shares has gone down to Rs 4.5 lakh in February 2024, while mutual fund holdings have grown to Rs 5 lakh.

Suppose you wish to liquidate these stocks and mutual funds. So, if you redeem these mutual fund units, the long-term capital gain (LTCG) on the redemption of mutual funds is Rs 2 lakh (sale value of Rs 5 lakh minus cost of Rs 3 lakh). Out of this, Rs 1 lakh is tax-exempt, which means your LTCG tax outgo will be Rs 10,400 (10 percent plus cess of 4 percent).

Likewise, you also sell your stocks at a loss (of Rs 1.5 lakh) for the purpose of tax planning, even though you wish to hold them for the long term. The intention is to reinvest the sale proceeds in the same stocks in the subsequent 2-3 days. This sale and reinvestment is a legal transaction and will not affect your investment amount or returns generated.

So, the long-term capital loss of Rs 1.5 lakh on share sale can be set off against the LTCG of Rs 2 lakh made on redemption of your mutual fund units. This will bring down your LTCG on mutual fund redemption to Rs 50,000. Since LTCG of up to Rs 1 lakh on equity assets is exempt from tax, your capital gains tax liability, therefore, will be nil, instead of Rs 10,400.

Note that there is no restriction in terms of asset classes on loss set-off. For instance, profits made on the sale of gold can be set off against a loss in equity. Also, in case losses from the sale of capital assets exceed the gains from such assets after setting off losses and gains of a particular year, you can carry forward such losses for up to eight assessment years.

However, do not forget an important caveat: your losses for the financial year cannot be carried forward unless you have filed the income-tax return (ITR) for that year before the due date (July 31).

What has to be kept in mind is that short-term capital loss can be set off against long-term and short-term capital gains whereas long-term capital loss can be set off only against long-term capital loss.

Submit salary proofs and tax documents on time

Salaried individuals should ensure that they submit proofs for flexible salary claims [like house rent allowance (HRA), leave travel allowance (LTA) etc] and tax documents for deductions under Sections 80C, 80D, etc., to their employers on time.

In its absence, you might not be eligible to claim certain deductions, such as HRA and LTA. Deductions under section 80C can be claimed directly at the time of ITR filing.

Make best use of Sections 80C and 80D

If you have opted for the old tax regime, allocate Rs 1.5 lakh towards avenues eligible for deductions under Section 80C. Choose investments that align with your financial goals and tax saving should only be a by-product of the financial strategy.

Section 80C investments include Equity Linked Savings Schemes (ELSS), Public Provident Fund (PPF), life insurance premium, etc. Section 80D allows deduction of medical insurance premium up to Rs 25,000 for self and family and Rs 50,000 for senior citizen parents.

Also Read | All about section 80D deductions on health insurance premiums

Review Annual Information Statement 

Check Annual Information Statement (AIS) and review the incomes appearing there. If you find any incomes reported in the statement inaccurate, report them to avoid potential income tax mismatch.

Proactive tax planning before the financial year-end can significantly reduce your tax burden while maximising savings and investment opportunities. By following these simple guidelines and leveraging available tax-saving avenues, you can ensure financial prudence and compliance with tax regulations.