Wash Sale
A wash sale refers to the practice of selling a security at a loss and repurchasing the same or substantially identical security shortly before or after the sale — primarily to realise a tax loss while maintaining the portfolio position; unlike the United States where wash sale rules under IRC Section 1091 disallow such losses, India has no wash sale prohibition, making the strategy legally permissible for Indian taxpayers.
The term wash sale originates from US tax law, where Internal Revenue Code Section 1091 disallows a capital loss deduction if the taxpayer repurchases a substantially identical security within 30 days before or after the sale. The rule was designed to prevent taxpayers from manufacturing artificial losses while maintaining their economic exposure to the security. India has deliberately chosen not to enact an equivalent restriction, creating an important structural difference between Indian and US capital gains taxation.
In India, an investor can sell a loss-making equity position on any trading day, immediately repurchase the same shares, and claim the capital loss for set-off under Section 70 of the Income Tax Act — all without any mandatory waiting period. The only requirements are that the loss must be an actual realised loss (unrealised losses do not qualify for set-off) and the transaction must be reported accurately in the ITR for the relevant assessment year.
This absence of wash sale rules makes loss harvesting — a component of tax harvesting strategy — significantly more powerful in India than in jurisdictions like the US, UK, or Australia which have their own variants of wash sale restrictions. An Indian investor holding a stock that has declined in value can sell it to lock in the loss, use the loss to offset STCG or LTCG elsewhere in the portfolio, and immediately repurchase to re-establish the position — maintaining market exposure without any gap.
However, two practical considerations must be noted. First, after repurchasing, the holding period for the new lot resets from zero. If the investor had previously held the stock for more than twelve months and sold it at a loss (LTCG loss), the repurchased shares start a new twelve-month clock. Selling those shares within twelve months generates a fresh STCG or STCL on the new lot. Second, transaction costs — brokerage, STT, exchange charges, and GST on brokerage — are incurred on both the sale and repurchase, which must be factored into the net benefit of the wash sale exercise.
From a compliance standpoint, the wash sale and immediate repurchase will appear as two separate transactions in the AIS and Form 26AS, both sourced from exchange data. The loss from the sale transaction must be reported in Schedule CG of ITR-2 or ITR-3. The CBDT has not issued any circulars specifically targeting wash sale strategies, and the practice remains clearly within the law as long as genuine exchange transactions occur with real STT payments.