Tax Loss Harvesting

Tax & Deductions

Tax loss harvesting is deliberately selling investments at a loss to offset capital gains from other investments, reducing tax liability. The harvested loss can be used against capital gains in the same year or carried forward for 8 years.

In detail

Tax loss harvesting rules:nSTCL (short-term capital loss): can offset STCG and LTCGnLTCL (long-term capital loss): can only offset LTCG (not STCG)nUnused losses: carry forward up to 8 assessment yearsnMust file ITR on time to carry forward losses (deadline July 31)nnBest time to harvest: February-March each financial year before April 1 reset.nnExample scenario: equity fund A shows Rs 2L gain (LTCG). Equity fund B shows Rs 80K unrealised loss (STCL). Sell fund B: Rs 80K STCL offsets Rs 80K of LTCG from fund A. Net LTCG = Rs 1.2L (within Rs 1.25L exemption). Zero tax. Reinvest in fund B (or similar fund) immediately.

Formula

Tax saved = Harvested loss x Applicable capital gains ratenRs 1L LTCG offset: saves Rs 1L x 12.5% = Rs 12,500nRs 1L STCG offset: saves Rs 1L x 20% = Rs 20,000

Real-life example

🇮🇳 India example

It is March 2025. Anita has Rs 3L STCG from sold equity shares (tax Rs 60K). She has Rs 1.8L unrealised loss in an underperforming mid cap fund. She sells the mid cap fund: Rs 1.8L STCL offsets Rs 1.8L of STCG. Net STCG = Rs 1.2L. Tax reduced from Rs 60K to Rs 24K. Saves Rs 36K. She reinvests in a similar (but different) mid cap fund to maintain her investment strategy.