AI isn't a magic wand. It works best when combined with good systems, informed investors and skilled advisors, says Amit Suri, director and CEO, AUM Wealth.
Can AI advise you about investments? Can it make you richer? How can investors and advisers harness artificial intelligence without losing sight of regulatory and ethical guardrails?
The answers reveal a form of 'alpha' (extra return beyond market average) that is subtle, repeatable and, when done well, harnesses the power of compounding.
The hidden cost in your portfolio
Investment decisions are usually driven by return potential and asset selection. But a crucial element is often ignored: tax efficiency -- how much of your returns/profits/gains you keep after taxes.
Even a portfolio that shows impressive gains can underperform if poorly managed as far as taxes are concerned. The type of investments you hold, when you redeem them and in which financial year you realise the gains -- all these can significantly affect your actual earnings.
The traditional challenge
Historically, staying tax-efficient demanded encyclopaedic knowledge of tax laws and constant tracking -- something most individual investors couldn't realistically manage using spreadsheets.
AI now offers a scalable solution. AI-powered systems analyse transaction patterns, personal financial profiles and tax regulations in real time. They are designed to be precise and timely -- offering tailored recommendations that help investors retain more of their gains without increasing risk.
So how exactly does AI offer this advantage? What does it look like in action? And how can investors and advisors use it wisely without ignoring legal and ethical boundaries?
The answers reveal a powerful form of alpha -- subtle, repeatable, and, if used correctly, harnesses the power of compounding.
Why tax efficiency gets overlooked
When investors discuss performance, the focus is usually on which assets to buy or which funds generate the best returns. But the impact of tax rarely enters the conversation even though it can meaningfully erode your final returns.
Take this example -- selling equity shares or mutual fund units on the 364th day (just before a year) attracts a 20 per cent short-term capital gains tax. But holding onto them for just one more day qualifies the profits for long-term capital gains tax at a lower rate of 12.5 per cent (for gains over Rs 1.25 lakh in a financial year).
Tax liability also depends on which units you sell. If you redeem units purchased at a lower cost, your gains -- and taxes -- will be higher.
When you sell matters too. For instance, selling on April 1 could shift your gains into a new financial year -- potentially placing you in a different tax bracket.
Without planning, these details quietly chip away at returns.
How AI turns tax rules into opportunities
Modern AI tackles tax efficiency in three smart steps:
1. Data consolidation: The AI system combines live market prices, updated tax rules, transaction history and future cash flow projections to get a complete picture.
2. Pattern recognition: It identifies:
3. Real-time recommendations: The system suggests:
A back-tested report by Morningstar finds that systematic tax-loss harvesting can add 0.9-1.2 per cent to annual after-tax returns in diversified portfolios.
Meanwhile, Wealthfront reports that its daily AI-based harvesting captures up to 80 per cent of the theoretical maximum benefit -- far better than traditional quarterly manual reviews.
Two investors, one algorithm: Real examples
Consider Meera, a 34-year-old salaried professional in the 30 per cent tax bracket, and Ravi, a 62-year-old retiree withdrawing monthly income using SWP (systematic withdrawal plan).
Meera's AI tool notices her equity fund is about to complete one year. It advises her to delay selling by three weeks so she qualifies for long-term capital gains tax at 12.5 per cent instead of 20 per cent.
The AI also guides her to invest her bonus in an ELSS (Equity Linked Savings Scheme) to claim a deduction under Section 80C. This saves tax and frees up cash for smarter investments.
Ravi's AI system plans withdrawals by selecting funds with the smallest gains, reducing taxable income. Knowing he may need money for medical expenses next year, the system gradually shifts a portion of his portfolio into safer, more liquid investments.
Both investors benefit -- not by chasing riskier returns but by applying smarter tax decisions.
Human advisors + AI = The ideal combo
According to surveys by EY and the CFA Institute, 92 per cent of wealth managers now use AI for tax planning or cash-flow modelling. But 57 per cent say a human layer remains essential.
Why? Because while AI excels at speed and accuracy, humans understand context, emotional triggers and real-life trade-offs. The best outcomes come when AI detects opportunities and advisors guide the investor through decisions.
Risks, limits and ethics
Using AI in tax management comes with some caveats:
Smart tax, smarter wealth
In a world where index funds and apps have made average market returns easy to access, outperforming the market is tougher than ever.
That's why tax optimisation may be the last big, low-risk lever to build wealth and AI is finally making it accessible.
But AI alone won't work miracles. It must be part of a well-built system with skilled human advisors and informed investors.
The firms that treat AI-powered tax planning as a core strategy -- not just a nice-to-have tool -- will quietly give their clients a lasting edge.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.