I had commented in another thread about doing some complicated stuff to help with harvesting of capital losses. This short post should help clarify my proposal.
Context: 1. Equity is volatile and can have reasonably deep drawdowns. A fall of 20% from market highs is possible and in fact should be expected. 2. Since LTCG in equity is taxable, LTCL can be used to set off gains and can also be carried forward. STCL can always be set off against both STCG and LTCG.
Assumption (a big one). Mutual funds in statement of account form are allotted in folios. The formal portals (RTAs, MFU, etc. as well as the AMCs) ask you to choose a folio when you want to redeem your units. The FIFO order for redemption is applied only within the folio. Personally I have seen this happen. CAMS gives average age of your investments and this changes within the folio.
Tactic:
year 1: good market, 10 units purchased each in equity and debt
year 2: good market, 10 units purchased
year 3: good market, 10 units purchased
year 4: bad market, 10 units purchased
year 5: bad market, 10 units purchased
Now in year 5, (or early in year 6), year 5 units would be in loss, year 4 units also would be in loss. Some would be LTCL and some would be STCL.
Now calculate the unrealized capital gains from year1,2, etc. Calculate unrealized capital losses from year 4 and 5.
a) Simple tactic - Sell only the units in loss, book the loss and carry it forward. You can use it in later years
b) More complicated - Sell enough units from both lots to make the sum zero. You can also look to use up the 1 lac per year exemption on LTCG. Of course you don't want to sell off everything
Create yet another folio and purchase enough units for the redemption amount. (Of course if you wanted to switch funds, you can do that too.)
Net, net - you have almost all the previous money (except for a very small STT) invested. You have done some accounting to either net off gains and losses and/or carry forward losses for future netting off. Of course, your investments are at a lower overall purchase price.
Please note that loss can be set off against gain from *any* capital asset. Some assets have indexation and some don't. Doing these monkey tricks helps you to possibly gain overall. If you had all the units in the same folio, there is no way for you to force a particular lot to be sold.
If you are dealing with only equity mutual funds, these tactics won't help much - since you would be lowering your acquisition cost. Booking 1 lac of LTCG every year is still helpful.
(For a reasonably simple and accurate description, please look up this blog post: https://www.relakhs.com/set-off-carry-forward-capital-losses/BTW, this and basunivesh.com seem to have a competition on the number of topical blog posts!)
Context: 1. Equity is volatile and can have reasonably deep drawdowns. A fall of 20% from market highs is possible and in fact should be expected. 2. Since LTCG in equity is taxable, LTCL can be used to set off gains and can also be carried forward. STCL can always be set off against both STCG and LTCG.
Assumption (a big one). Mutual funds in statement of account form are allotted in folios. The formal portals (RTAs, MFU, etc. as well as the AMCs) ask you to choose a folio when you want to redeem your units. The FIFO order for redemption is applied only within the folio. Personally I have seen this happen. CAMS gives average age of your investments and this changes within the folio.
Tactic:
- If you are dealing with a handful of mutual funds, create folios periodically. An useful thing would be to create a folio every financial year.
- During that period, buy mutual fund units in that folio. After the period is over, create another folio.
- After a few years, you would have a set of folios with different average age, and hopefully different unrealized capital gains and losses.
year 1: good market, 10 units purchased each in equity and debt
year 2: good market, 10 units purchased
year 3: good market, 10 units purchased
year 4: bad market, 10 units purchased
year 5: bad market, 10 units purchased
Now in year 5, (or early in year 6), year 5 units would be in loss, year 4 units also would be in loss. Some would be LTCL and some would be STCL.
Now calculate the unrealized capital gains from year1,2, etc. Calculate unrealized capital losses from year 4 and 5.
a) Simple tactic - Sell only the units in loss, book the loss and carry it forward. You can use it in later years
b) More complicated - Sell enough units from both lots to make the sum zero. You can also look to use up the 1 lac per year exemption on LTCG. Of course you don't want to sell off everything
Create yet another folio and purchase enough units for the redemption amount. (Of course if you wanted to switch funds, you can do that too.)
Net, net - you have almost all the previous money (except for a very small STT) invested. You have done some accounting to either net off gains and losses and/or carry forward losses for future netting off. Of course, your investments are at a lower overall purchase price.
Please note that loss can be set off against gain from *any* capital asset. Some assets have indexation and some don't. Doing these monkey tricks helps you to possibly gain overall. If you had all the units in the same folio, there is no way for you to force a particular lot to be sold.
If you are dealing with only equity mutual funds, these tactics won't help much - since you would be lowering your acquisition cost. Booking 1 lac of LTCG every year is still helpful.
(For a reasonably simple and accurate description, please look up this blog post: https://www.relakhs.com/set-off-carry-forward-capital-losses/BTW, this and basunivesh.com seem to have a competition on the number of topical blog posts!)