Tax harvesting can help you save tax. Should you do it?

Did you know profit from equity investments over 12 months old are taxed at 10 per cent? However, gains up to Rs 1 lakh are exempt.

That means if you have a Rs 5 lakh investment and the gain is Rs 1 lakh or below, you can withdraw your investment without paying tax. This is only if your investment is at least a year old.

What is tax harvesting?

The above example is a type of tax harvesting.

Basically, if your investment gains are within the Rs 1 lakh limit, you can sell your investment, realise the gain, and reinvest without paying taxes. This strategy allows you to escape tax.

Is it worth it?

Not really. Because you are saving only a small amount in tax (Rs 10,000 on Rs 1 lakh gain) each year.

This hassle of selling and reinvesting each year may not be worth it, especially for long-term investors. In fact, for larger investors, the savings are even more minute.

We analysed the strategy in greater detail in one of our stories. (Check the story here). During the number crunching, we found that an investor who followed tax harvesting each year earned just 0.29 per cent higher post-tax returns than an investor who didn't.

Are there other issues?

It takes T+2 days (2 working days; not counting the day of the withdrawal request) for the investment money to be transferred to our bank account. But what if the NAV of the mutual fund sees a significant jump in that period? You'll miss out on that opportunity.

To conclude, the result doesn't justify the effort, especially for an investor with a bigger investment corpus.

Also read: Last-minute tax planning? Here's where you should invest