Let's look at an example to see how tax-loss harvesting works:
Saurabh's investing portfolio includes cryptocurrency, stocks, equity funds, and debt funds, among other things. Saurabh's portfolio performed as follows at the end of the financial year
80,000 rupees in short-term capital gains
150,000 Rupees in Long-Term Capital Gains
As a result, Saurabh owes the following tax:
STCG Tax = Rs. 12000 x 15% = Rs. 80000
Tax on Long-Term Capital Gains = (150000–100000) x 10% = Rs. 5000
Total tax liability = Rs. 17,000 (12000 + 5000).
Saurabh, on the other hand, notes that several assets in his portfolio have fallen to dangerously low levels, with little hope of recovery. He consults with an investment advisor, who advises him to use tax-loss harvesting. He sells the equities and takes Rs. 30,000 short-term capital loss. The money he receives is then invested in additional promising equities or equity funds. As a result, his tax liability is:
STCG Tax = Rs. 7500 (80000 – 30000) x 15%
Tax on Long-Term Capital Gains (LTCG) = Rs. 5000
7500 + 5000 = Rs. 12,500 total tax burden
As a result, he saves Rs.3500 in tax. Furthermore, because he has invested the proceeds of the sale in another stock/mutual fund, there is a chance that he will be able to recoup his losses if the stock/fund performs well. This aids him in maintaining the portfolio's asset allocation.