Here are 2 ways to save tax on capital gains

And the most popular way is to redeem and reinvest it. Here is how it works:

For example, suppose an investor made ₹4.9 lakh from mutual fund investments of ₹4 million. The investor has to redeem the entire amount and reinvest it. Next year, the total fund becomes ₹5.6 lakh, i.e. gain price ₹70,000 Now, if you had not redeemed and reinvested, the capital gain would be ₹Out of this 1.6 lakh ₹60,000 will be taxable.

However, it is extremely important to reinvest the money immediately. Otherwise, if the money is lying idle in the bank, it will be spent or unfavorably invested, thus the strategy loses its purpose.

Another way to do it is by Tax Loss Harvesting. Here is how it works:

Tax loss harvesting is a method of reducing tax on capital gains through set-off against capital loss. In other words, someone is using up a capital loss that you may have to adjust against the capital gain, says Amit Trivedi, personal finance coach and author of Riding the Roller Coaster.

Further explaining how the method works, he says, “Suppose that in a year, a person has earned Rs. accrued capital gains of. 2,50,000 in Equity Mutual Funds. Assuming that there is no other capital gain, the taxable capital gain would be Rs. 1,50,000 as the first Rs. 1,00,000 of capital gains in a year is tax-exempt.”

Whereas, if one has a capital loss of Rs. 1,20,000 in the same year; This loss will be adjusted against taxable capital gain of Rs. 1,50,000. Thus one comes to a net capital gain of Rs. 30,000 (Rs. 1,50,000 – Rs. 1,20,000). He said that the tax would be payable only on these net profits.

Also, losses booked in one year can be carried forward for 8 years to reduce tax on capital gains in subsequent years as well.

That is, suppose you have made a capital loss of ₹40,000 in 2018, and booked capital gains ₹1.8 lakh in 2020. When calculating taxes for 2020, you can remove ₹to 40,000 ₹1.8 lakh and thus the taxable amount will be ₹40,000.