The tax harvesting method is very useful for those taxpayers with long-term capital gains (LTCG) income derived from the sale of equities. One of the noteworthy features of the tax harvesting method is that it can be used in both old and new tax regimes to save income tax. To give a short brief about tax harvesting, it means you sell your equities by March 31 up to the LTCG tax exemption limit of Rs 1.25 lakh for FY 2024-25 and then buy them back on April 1, 2025.It makes more sense to use the tax harvesting method this year (FY 2024-25) for two reasons:
- If you have LTCG income up to a certain limit, then you will pay lower capital gains tax than FY 2023-24
- The tax-free exemption limit has been increased from Rs 1 lakh to Rs 1.25 lakh on or after July 23, 2024
Read below to learn more about effectively utilising the tax harvesting method to save more on taxes compared to the previous financial year.
Use tax harvesting method to save long term capital gains tax on equities on or before March 28, 2025 for FY 2024-25
The problem in FY 2024-25 is that March 31, 2025, is a holiday for the stock market. Therefore, you must use the tax harvesting method before March 28, 2025, if you want to save income tax. For income tax purposes the date of transaction is vital importance hence if you want to save LTCG tax on equities use tax harvesting method on or before March 28, 2025.
How can tax harvesting method save you more income tax than FY 2023-24?
To understand how the tax harvesting method can result in greater income tax savings in FY 2024-25 compared to FY 2023-24, it is essential to first understand the implication of Section 112A in FY 2023-24.
Section 112A in FY 2023-24 provided a tax exemption of Rs 1 lakh on LTCG on equities income. “The LTCG exemption limit for equities (listed equity shares and equity-oriented mutual funds) was Rs 1 lakh. Any LTCG arising from the transfer of listed equity shares exceeding Rs 1 lakh in that fiscal year was taxed at 10% (without indexation benefits) for FY 2023-24,” says Chartered Accountant (Dr.) Suresh Surana.
In the Union Budget 2024, presented in July, this section was amended, and the tax exemption limit for LTCG on equities was increased from Rs 1 lakh to Rs 1.25 lakh. The Budget 2024 also increased the LTCG income tax rate from 10% to 12.5%. So, this means if you have any LTCG income above Rs 1.25 lakh, then that additional income will be taxed at a 12.5% rate.
Calculations showing how you can save more income tax in FY 2024-25 than FY 2023-24
| LTCG on equities | Tax @10% FY 2023-24 | Tax @12.5% FY 2024-25 (on or after 23 July 2024) | Tax savings/ additional tax payable in FY 2024-25 |
| Rs 1,00,000 | No tax | No tax | – |
| Rs 1,25,000 | Rs 2500 (Rs 1.25L-1L=Rs 25,000*10%) | No tax | Rs 2500 tax savings |
| Rs 1,50,000 | Rs 5,000 (Rs 1.5L-1L=Rs 50,000*10%) | 3125 (Rs 1.5L-Rs 1.25L=Rs 25,000*12.5%) | Rs 1875 tax savings |
| Rs 2,00,000 | Rs 10,000 (Rs 2L-Rs 1L=Rs 1L*10%) | Rs 9375 (Rs 2L-Rs 1.25L=Rs 75,000*12.5% | Rs 625 tax savings |
| Rs 2,25,000 | Rs 12,500 (Rs 2.25L-Rs 1L=Rs 1.25L*10%) | Rs 12,500 (Rs 2.25L-Rs 1.25L=Rs 1L*12.5%) | Equalization point (no tax savings or payable extra) |
| Rs 3,00,000 | Rs 20,000 (Rs 3L-1L=Rs 2L*10%) | Rs 21,875 (Rs 3L-Rs 1.25L=Rs 1.75L*12.5%) | Rs 1,875 tax payable |
| Rs 5,00,000 | Rs 40,000 (Rs 5L-Rs 1L=Rs 4L*10%) | Rs 46,875 (Rs 5L-Rs 1.25L=Rs 3.75L*12.5%) | Rs 6875 tax payable |
Source: CA (Dr.) Suresh Surana
Prior to July 23, 2024, the LTCG rate and exemption limit is same as FY 2023-24 i.e. tax exempted up to Rs 1 lakh and any amount over this is taxable at 10% rate.
LTCG Taxation for FY 2024-25
There are two systems to follow for FY 2024-25 with respect to LTCG on equities:
Applicability of Revised Exemption and tax rates
- For LTCG income made before July 23, 2024 – The LTCG exemption limit is Rs 1 lakh, and any gains exceeding this threshold will be taxed at 10% (excluding surcharge and cess).
- For LTCG income made on or after July 23, 2024 – The LTCG exemption limit increased to Rs 1.25 lakh, and any gains exceeding this threshold will be taxed at 12.5% (excluding surcharge and cess).
“The LTCG exemption limit on listed equity shares and equity-orientated mutual funds has increased from Rs 1 lakh to Rs 1.25 lakh per year, effective from July 23, 2024. However, the tax rate on long-term capital gains exceeding this limit has also been increased from 10% to 12.5%. Taxpayers will generally benefit from the increased exemption limit, leading to potential tax savings on long-term capital gains. However, the extent of savings depends on the total gains realised due to the revised tax rate structure,” says Surana.
Experts say that the LTCG tax exemption applies only to listed equities, but the tax rate applies to all, even to unlisted. According to Surana, after the Budget 2024 amendment, “the long-term capital gains tax rate on equity shares, whether listed or unlisted, has been standardised at 12.5%. However, the exemption of Rs 1.25 lakh is applicable only to listed equity shares.”
