Tax Harvesting
Tax harvesting is a portfolio management technique where investors strategically book capital gains or losses before the end of a financial year to either utilise the annual LTCG exemption, reset the cost of acquisition at current prices, or set off losses against taxable gains — thereby legally reducing the overall capital gains tax liability.
Tax harvesting encompasses two related but distinct strategies: gain harvesting and loss harvesting. Gain harvesting specifically refers to booking long-term capital gains up to the annual exemption threshold (₹1.25 lakh under Section 112A post-Budget 2024) and immediately repurchasing the same securities. The effect is to reset the cost of acquisition to the current market price, eliminating accumulated but unrealised LTCG without paying any tax — as long as total gains remain within the exemption limit.
Loss harvesting involves realising unrealised losses on securities to set them off against capital gains from other transactions in the same year. Under Section 70 of the Income Tax Act, short-term capital losses can be set off against both short-term and long-term capital gains. Long-term capital losses (available post-April 1, 2018) can only be set off against long-term capital gains. Losses not absorbed in the current year can be carried forward for eight years under Section 74, but they must be reported in the original ITR — losses not reported in the return cannot be carried forward.
For equity investors, the annual gain harvesting exercise is typically conducted in late February or early March, close to the financial year-end but with enough time for the trade to settle and the holding period to be re-established before March 31. The securities are sold and bought back the next day or after a brief interval. SEBI has no wash sale rules (unlike the US IRS), so the same securities can be repurchased immediately without losing the tax benefit — a meaningful advantage for Indian investors.
The mechanics require careful attention to holding period. After repurchasing, the clock on the holding period resets to the new purchase date. If the repurchased securities are sold within twelve months, gains will be treated as short-term under Section 111A. The investor must hold the repurchased securities for at least twelve months to qualify for LTCG treatment again on future sale.
Tax harvesting is most effective for long-term equity investors with portfolios that have been held for multiple years and carry significant unrealised gains. For smaller portfolios where total LTCG is unlikely to exceed ₹1.25 lakh in any year, the strategy adds limited value. The transaction costs — brokerage, STT, exchange charges — must be weighed against the tax saving to assess net benefit.