Use these two methods to reduce taxes on your capital gains

Use these two methods to reduce taxes on your capital gains:

Swap to reinvest: Suppose that in a given year you did ??4.9 lakh of a mutual fund of ??4 lakh. Now you redeem the entire amount and invest it again. The following year, the total corpus becomes ??5.6 lakh, i.e. gain in value ??70,000.

Now, in case you hadn’t redeemed and reinvested, the capital gains would be ??1.6 lakh, of that ??60,000 would be taxable.

The method of redeeming mutual fund investments to reinvest more to reduce taxes is called tax harvest. However, it is extremely essential to reinvest the money immediately. Otherwise, if the money remains inactive in the bank, it will be spent or invested unfavorably, so that the strategy loses its purpose.

Harvesting tax losses: Another great strategy for reducing taxes, through this method, the capital loss in a given year can be used to adjust taxable capital gains, says Amit Trivedi, personal finance coach and author of Riding the Roller Coaster.

Explaining further how the method works, he says: “Let’s say that in one year you have realized capital gains worth ??2 50,000 of an investment in a particular equity mutual fund. And for this, the taxable capital gains would be ??150,000. “

“At the same time, he suffered a capital loss worth ??120,000 from another fund the same year. Then, this loss would be adjusted to the taxable capital gains of ??150,000 from the previous fund. “

We thus arrive at the net value of capital gains ??30,000, on which tax would be payable, he adds.

In addition, unabsorbed losses for a given fiscal year could be carried forward for 8 years to reduce capital gains tax even in subsequent years, says Renu Maheswari, Renu Maheshwari, SEBI Registered Investment Advisor, CEO and Advisor principal at Finzscholarz.

In other words, suppose you have suffered a capital loss of ??40,000 in 2018, and capital gains recorded of a value ??1.8 lakh in 2020. When calculating taxes for 2020, you can remove ??40,000 ??1.8 lakh and this way the taxable amount would be ??40,000.

“It can be done in debt funds as well as in equity funds. It is a good technique to take advantage of market dips and reduce tax expenditure, ”explains Renu Maheswari, financial advisor and founder of Finolarchz.

This method can increase the net returns of the portfolio. The best thing is that even a bad year can add to the value of the portfolio, concludes Maheswari.