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What is tax loss harvesting and how to do it in India
Tax loss harvesting is the deliberate booking of losses on underperforming investments to offset capital gains from winning ones, reducing your net taxable capital gain. In India, losses can be carried forward for 8 years.
In one line
Tax loss harvesting means selling investments that are sitting at a loss before the financial year ends to offset capital gains earned elsewhere, so if you have a 2 lakh STCG on one stock and a 1 lakh unrealised loss on another, booking that loss legally reduces your taxable STCG to 1 lakh and the resulting tax saving is immediate and certain.
BazaarBaaziSource & method
How the offset works
When you sell a security at a loss, that loss becomes a capital loss, and it can be set off against capital gains in the same year. The Income Tax Act sets two matching rules. A short-term capital loss (on assets held 12 months or less) can be offset against any capital gain, whether short-term or long-term. A long-term capital loss (on assets held more than 12 months, where LTCG tax applies) can only be offset against long-term capital gains.
The netting happens within the same financial year. If your gains exceed your losses after netting, you pay tax only on the net positive amount. If your losses exceed your gains, the net loss cannot be set off against salary or other income, but it can be carried forward for up to 8 assessment years and set off against future capital gains of the permitted category. To carry forward a loss, you must file your ITR by the due date, even if your total income is below the taxable threshold.
How to execute it in India
The mechanics are straightforward. Review your portfolio before the financial year ends (before 31 March). Identify positions sitting at an unrealised loss. Sell them to crystallise the loss and create a usable set-off against your gains. You can immediately rebuy the same stock if you still want the position, since India has no wash-sale rule preventing this for individual investors. The new purchase creates a fresh cost basis at today's price.
Do the arithmetic before selling. The brokerage, STT, and other transaction charges eat into the saving. If the tax saving from the harvested loss is smaller than the transaction cost of selling and rebuying, the trade is not worth making. Tax loss harvesting is most powerful when you have a large short-term gain (taxed at 20%) to offset, because the rate differential against long-term gains is smaller.
What to watch for
The loss must be a real loss, not a notional one. You must actually sell the security and the loss must be recorded in your books. Unrealised losses sitting in your demat account do nothing for your tax calculation in the current year.
Capital losses from listed equity transactions cannot be set off against business income or salary. They can only offset other capital gains. If you have speculative losses (from intraday equity trading), those can only be set off against speculative gains in the same or future years. The categories are ring-fenced, so matching the right type of loss to the right type of gain is essential. A tax practitioner can help if your capital gain and loss profile is complex across multiple asset classes.
FAQ5 reader questions · AEO-eligible
Common questions on tax loss harvesting.
Can I sell a stock at a loss and buy it back immediately?
Yes, in India there is no wash-sale rule for individuals that prevents you from selling a stock to book a loss and then immediately rebuying it. The sale crystallises the loss for tax purposes and the rebuy sets a new, lower cost basis.
How many years can I carry forward a capital loss?
Capital losses can be carried forward for 8 assessment years from the year in which the loss was incurred, provided you filed your ITR by the due date in the loss year.
Can a long-term capital loss offset a short-term capital gain?
No. A long-term capital loss can only be offset against long-term capital gains. A short-term capital loss, however, can be offset against both short-term and long-term capital gains.
Does tax loss harvesting work for mutual funds?
Yes. Unrealised losses in equity mutual fund units or debt fund units can be crystallised by redeeming units before year-end and the resulting capital loss can be set off against other capital gains as per the same rules.
Is tax loss harvesting legal in India?
Entirely legal. It is a straightforward application of the capital gains set-off provisions in the Income Tax Act. It is standard practice for informed investors and their chartered accountants ahead of March 31 each year.
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