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Tax-loss harvesting. It’s very simple in theory but that hard to execute if you’re striving for perfection and automation.Let’s say you have a nice little portfolio whose sector wise allocation looks like this:Fig. 1: All prices in this answer are hypothetical and just for the sake of calculating convenience. Also, the one above it not a well diversified portfolio.The stocks you have purchased are:HDFC Bank (Banking) bought at 900/-Lupin (Pharma) bought at 600/-TCS (Tech) bought at 1200/-Bajaj Auto (Auto) bought at 800/-Total Invested amount = Rs 3500Let’s say you purchased all the stocks in May 2014Fig. 2: Price the you purchased at in May 2014.You’ve done your research and you’re pretty sure that your stocks are going to rise. By October this is what your portfolio looks like.Fig. 3: Market prices as on October 2015 in green . Your Lupin stock decreased from 600/- to 450/-Your Lupin stocks lost Rs 150. Bummer right? Not really. What you can do is sell your Lupin stocks and immediately purchase a similar stock.By similar stock I mean one in the same sector (pharma in this case) or one that has ~1 co-efficient of correlation (historical) with Lupin. Sun Pharma maybe? If you don't want to do that and want to stick to Lupin, you can purchase Lupin stock after 2 days once they have been delivered off your demat account (T+2 settlement). This way you booked a small loss on your Lupin stock while not changing your exposure to the pharma sector (portfolio’s sector wise capital allocation remains intact).By the end of the financial year, in March 2015 the portfolio looks like this:Fig. 4: Prices as on March 2015 in yellow.Let’s see how this affects your after tax returns.Scenario 1: You didn’t listen to Anurag and DID NOT DO TAX LOSS HARVESTING.In this case, let’s assume you hold on to your Lupin stock because you think your research is correct (and rightly so) and you want exposure to the pharma sector; and you sell the rest. You now have a net profit of Rs 1,200.Your net tax liability is going to be Rs 180 (15% of short term capital gains [1][2]). This makes your post-tax returns stand at Rs 1020 or 29.14% on your principal investment capital of Rs 3500. Not bad! Now lets see how this changes if you did do tax loss harvesting.Scenario 2: You read Anurag’s answer which he took 2 hours to type and make colourful charts and DID TAX LOSS HARVESTING.So what you basically do is sell off your Lupin stock in October at Rs 450 and book a loss of Rs 150. You can now replace it with a stock of Sun Pharma or re-purchase Lupin stock two days after selling it, once it had been delivered off your demat account (hence being accounted as a new investment and not continuation of the same one in the eyes of the tax man). Let’s say you went for the second i.e. repurchase Lupin stock. This is always simpler for a retail investor to execute rather than figure out the mathematics and the computing required to find a similar stock that will replace the original one without disturbing the capital allocation of your portfolio.What happens now is that you net profits are still Rs 1200 but in between you’ve booked losses of Rs 150 in between. You can adjust this loss with your profits. Your taxable net capital gains in now Rs 1200 - Rs 150 = Rs 1050. You net taxes payable is now Rs 157.5 (15% of Rs 1050) compared to Rs 180 in Scenario 1. Which means that your after tax net profit is Rs 1050 or a 29.78% post tax profit margin.Fig. 5: A summary table of both scenarios.You just magically increased the after tax returns on your portfolio by 0.64% by capitalizing on a loss making stock. Imagine doing this 20 times a year.tl;dr sell the loss making stocks in your portfolio and replace them with similar stocks and adjust the loss with your net profits to reduce your tax liability and increase your post tax returns.[1] http://www.incometaxindia.gov.in/Tutorials/14-%20STCG.pdf[2] Zerodha Taxation for Traders - Varsity

There is a difference between the tax slab system and the rebate system. When Mr. Piyush Goyal was announcing the budget, there was an impression that the tax slab has been changed and that there is no income tax up to ₹5 lakh. That would have been a huge step, as such a large exemption limit has never been seen in the country as of now.However, the tax slab has not changed. What has changed is that the rebate allowed to people having income of up to ₹5 lakh has been increased to ₹12500. Effectively, this means that income of up to ₹5 lakh will not be charged. But that is applicable only in selected cases.In order to understand this, let’s start with the tax slab system.The slab system of taxation means that income is separated into blocks. Then these blocks are taxed at different rates. For example, if your income is ₹12 lakh, then it will be separated into following blocks:First block of ₹2.5 lakh, which will not be taxedSecond block of ₹2.5 lakh, taxed at 5%Third block of ₹5 lakh, taxed at 20%Fourth block of ₹2 lakh, taxed at 30%Effectively, your tax payable shall be ₹172500.The slab system decides the limits for separating these blocks. The exemption limit is up to ₹2.5 lakh - so that becomes the first block. The next block is from ₹2.5 lakh to ₹5 lakh (i.e. net ₹2.5 lakh taxed at 5%). The third block is from ₹5 lakh to ₹10 lakh (i.e. net ₹5 lakh taxed at 20%). The fourth block is anything above ₹10 lakh (i.e. ₹2 lakh in our example).Now, if the tax slab is changed, then it is applicable for all people. Even for those whose income is ₹10 lakh or above. Therefore, if the government had raised the basic exemption limit to ₹5 lakh, then the blocks would be changed for everyone, effectively saving a tax of ₹12500. The new blocks would have been different, like this:First block of ₹5 lakh, which will not be taxedSecond block of ₹5 lakh, taxed at 20%Third block of ₹2 lakh, taxed at 30%The effective tax would have been ₹160000 (i.e. everyone would have saved ₹12500 from their total tax expense in a year).But this has not happened.What has happened is that the rebate has increased.What is tax rebate?The rebate system is pretty straightforward. First, your income is computed net of all the investments. And then the tax is calculated. Thereafter, if your income is up to ₹5 lakh (net of all investments), then your total income tax is reduced by a maximum of ₹12500. That’s it.There are two important aspects here:The limit of ₹5 lakh is seen after taking into account all the deductions that are already given as per Section 80C.Rebate is applicable only if the net income, after such deductions, does not exceed ₹5 lakh. Otherwise the rebate is zero.Some examples will help to understand this.Let us assume that your income is ₹5 lakh, then the slab system means that your tax would be ₹12500. From this, a rebate is allowed of up to ₹12500 and the effective tax payable becomes zero. However, if your income is even slightly higher than ₹5 lakh, then the rebate shall not be allowed at all.Some examples of what this really meansIf your income is ₹6 lakh (before investing in any notified options), then the income tax payable by you shall not change at all.However, if your income is ₹6 lakh and you decide to invest ₹1 lakh in notified options, such as FD, then your tax payable shall be computed in the following manner:First block of ₹2.5 lakh, not taxedSecond block of ₹2.5 lakh, taxed at 5%Total tax ₹12500, minus rebate of ₹12500. Effective tax = 0.But, let’s say your income is ₹10 lakh, then your income tax payable shall not change at all. Because this rebate is not applicable in your case.Thus, the rebate system benefits only those people whose income is up to ₹5 lakh. Anything above that, is not covered here. On the other hand, if the slab rates had changed, then everyone would have benefited from it, regardless of their income level. That’s the difference.Reality check of the benefits this would createConsider a person whose income is ₹6.5 lakh. Normally, his income tax payable would be ₹42500 as per the slab system. Now, if he decides to invest ₹1 lakh under Section 80C, then the income tax payable would be ₹22500. If he decides to invest ₹1.5 lakh, however, the tax payable would be zero.The crux of the matter is that, for the benefit of tax rebate to kick in, you’d have to invest money on top of having a lower income. If your income is ₹6 lakh, you are earning about ₹50000 per month. In most companies, all the income is not available in cash. Some of it is in the form of perquisites.Moreover, one must also consider the expenses.For a person having an income of ₹50000 and surviving in a metro city, there is a cost of ₹20000 per month, at least, all things considered. That leaves them with ₹30000 per month to spare. Of this ₹360000, they would need to invest ₹150000 in various schemes as per Section 80C.This includes options that come not without cost:Provident fund is a high return option, but the lock-in period is very long. This means you can’t access your funds for a long time.Investing in fixed deposits has a lesser lock-in period of 5 years, but then the return on that investment is not lucrative. If, for example, you get a tax benefit of ₹12500 by investing in a FD, that translates into a benefit of 8% for one year. If you divide it by 5, you get an effective interest rate of about 1.6% - which is just what you get by investing in a one year FD. In short, it’s not that lucrative considering that your money would be blocked for 5 years.Alternatively, you could invest in insurance plans. This is good, and every person must have insurance. The problem is that unless you’re insuring a lot of money, you cannot hope to invest much in such avenues. Because insurance is not a worthy investment (usually) for a person that young. Especially if it’s ULIP.There is also an option to invest in mutual funds, but that’s risky, and I usually don’t advice a person having incomes of up-to ₹5 lakh to go broad on risks without securing a base.Bottom line is: this is an additional incentive for people to invest. But it’s applicable for people who don’t have a lot of breathing space to invest. There are commitments that you have to fulfil now, and so often money is not available for investing at all. That is sad.I don’t want to sound all gloomy, though. It’s a good move. All I wanted to do is to emphasise that it’s not as great as it is purported to be, we need to be realistic in order to assess the benefit of this.EditI was probably not clear. A lot of people are getting confused about this. The truth is simple - you get a rebate of ₹12500 if your total income (after investment) is less than ₹5 lakh. If your income even before investment is less than ₹5 lakh, then you will get the rebate of ₹12500.My calculations regarding the investments was only illustrative. Don’t take every figure seriously. Just understand the law.

Will the IRS deny my tax return?The IRS doesn’t deny tax returns. You submit yours, and if they think you misrepresented or falsified any information, they will let you know.Like many situations, your filing is actually just a voluntary process to make the payment of taxes easier. The IRS already has access to most of the records that show your income. *IF* you give them reason to check, they will. That’s when they might dispute your calculations and adjust your taxes - and either send you a refund or a bill.Often, the computers which process returns will automatically make minor corrections and merely send you a notice for your presumed approval, which you can deny if you think they, not you, made the error.