Tax-Loss Harvesting in India: How to Legally Reduce Your Capital Gains Tax

What is tax-loss harvesting?

Tax-loss harvesting is the practice of intentionally selling investments that are currently at a loss in order to realise (book) a capital loss. This capital loss can then be used to offset capital gains from other investments, reducing the total tax payable on capital gains for that financial year. If the capital loss exceeds all capital gains, the excess loss can be carried forward and used to offset gains in future years (up to 8 years).

The key insight is that unrealised losses have no tax benefit. A stock sitting in your demat account at a loss does nothing for your tax liability. Only when you sell it and realise the loss does it become a capital loss that the Income Tax Act recognises for set-off purposes. Tax-loss harvesting is the deliberate act of converting unrealised losses into realised losses at strategically chosen moments.

This is not about exiting because you expect further decline. It is purely a tax-efficiency technique. In fact, the core version of the strategy involves selling the loss-making holding and then repurchasing the same security immediately — so your portfolio composition remains unchanged, but you have booked a loss for tax purposes.

India's capital gains tax framework: a quick refresher

To understand tax-loss harvesting, you need to know the capital gains tax rates that apply to listed equity in India (as of the current framework). For a more detailed treatment, see our LTCG guide and STCG guide.

• Short-term capital gains (STCG): Listed equity held for less than 12 months. Taxed at 20% under Section 111A (revised from 15% effective 23 July 2024).
• Long-term capital gains (LTCG): Listed equity held for 12 months or more. Taxed at 12.5% under Section 112A on gains exceeding Rs 1,25,000 per financial year (revised from 10% above Rs 1 lakh effective 23 July 2024).

The Rs 1.25 lakh annual LTCG exemption is the foundation of the gain harvesting strategy discussed later in this article.

Why India has an advantage: no wash sale rules

In the United States, the IRS enforces "wash sale rules" that disallow a capital loss if the investor repurchases the same or a "substantially identical" security within 30 days before or after the sale. This forces US investors to wait 31 days before re-entering the position, during which the stock might recover (and the investor misses the rebound).

India has no wash sale rules. As of the current Indian tax framework, there is no provision in the Income Tax Act that disallows a capital loss if the same security is repurchased within any time frame. An Indian investor can:

• Sell shares at a loss on Monday
• Book the capital loss for tax purposes
• Repurchase the exact same shares on Tuesday (or even on the same day, if selling from one demat account and purchasing in another)

The loss is fully recognised by the tax authorities. The new purchase establishes a new cost basis at the lower repurchase price. This absence of wash sale restrictions makes tax-loss harvesting in India significantly more powerful and practical than in most developed markets.

Tax-loss harvesting: step-by-step process

Here is the practical sequence for executing a tax-loss harvest:

Step 1: Identify loss-making holdings. Review your portfolio for positions currently showing an unrealised loss. Prioritise positions where the loss is material (large enough to meaningfully offset gains) and where the holding period classification (short-term vs long-term) matches the type of gain you want to offset.

Step 2: Determine the gains you need to offset. Check your realised capital gains for the financial year so far. If you have Rs 3 lakh in realised STCG, you need to harvest enough short-term losses to reduce or eliminate this taxable gain. If you have Rs 5 lakh in LTCG (above the Rs 1.25 lakh exemption), you need long-term losses — or short-term losses, which can offset either type.

Step 3: Sell the loss-making positions. Place sell orders for the identified holdings. The sale must settle (T+1 for equity delivery trades) within the financial year — so transactions executed on the last trading day of March will settle in time. Record the sale price and the loss booked.

Step 4: Repurchase (optional but typical). If you still want exposure to the same stock, repurchase it on the next trading day (or even the same day through a different route). The repurchase establishes a new, lower cost basis. Since India has no wash sale rules, the loss from Step 3 is fully valid regardless of the repurchase timing.

Step 5: Document everything.Maintain records of the sale, the loss booked, and the repurchase. Your broker's capital gains statement will capture the realised loss. File your income tax return (ITR-2) before the due date to preserve the right to carry forward any unabsorbed losses. See our ITR capital gains filing guide for the detailed process.

Practical example: STCG harvesting

Consider the following illustrative scenario for FY 2025-26:

An investor sold Stock A in August 2025, held for 8 months, and booked a short-term capital gain of Rs 2,00,000. STCG tax at 20% = Rs 40,000 (plus cess).

In February 2026, the investor holds Stock B, purchased 6 months ago at Rs 5,00,000, now trading at Rs 3,50,000 — an unrealised short-term loss of Rs 1,50,000. The investor believes Stock B will recover over the next year but wants to use the current loss for tax efficiency.

Action: The investor sells Stock B at Rs 3,50,000, booking a short-term capital loss of Rs 1,50,000. The next day, the investor repurchases Stock B at approximately the same price (say Rs 3,52,000 including minor price movement and brokerage).

Tax result: STCG from Stock A = Rs 2,00,000. STCL from Stock B = Rs 1,50,000. Net STCG = Rs 50,000. Tax at 20% = Rs 10,000 (plus cess). The investor saved Rs 30,000 in STCG tax while maintaining the same portfolio exposure to Stock B. The new cost basis for Stock B is Rs 3,52,000 (the repurchase price), which means any future gain will be calculated from this lower base.

LTCG harvesting: the Rs 1.25 lakh exemption strategy

Tax-loss harvesting is about booking losses. But there is a complementary strategy — tax-gain harvesting (sometimes called LTCG harvesting) — that takes advantage of the Rs 1.25 lakh annual LTCG exemption under Section 112A.

Under Section 112A, long-term capital gains from listed equity (shares and equity mutual funds held for over 12 months) are exempt up to Rs 1,25,000 per financial year. Gains above this threshold are taxed at 12.5%.

The strategy: each financial year, redeem long-term equity holdings to realise gains of up to Rs 1,25,000. Since this amount is tax-free, no tax is payable. Immediately repurchase the same securities. The repurchase establishes a new, higher cost basis. This process effectively resets the clock — the unrealised gain that was building up has been partially crystallised tax-free, and future gains will be measured from the new, higher cost.

Illustrative example: An investor purchased shares of a Nifty 50 index fund at Rs 10,00,000 three years ago. The current value is Rs 15,00,000 — an unrealised LTCG of Rs 5,00,000. If sold entirely, LTCG tax would be 12.5% of (Rs 5,00,000 - Rs 1,25,000) = 12.5% of Rs 3,75,000 = Rs 46,875.

Instead, the investor sells only one-quarter of the holding (value Rs 3,75,000, cost Rs 2,50,000) to realise an LTCG of exactly Rs 1,25,000. Tax = nil (within the exemption). The investor immediately repurchases the same units at Rs 3,75,000. The new cost basis for these units is Rs 3,75,000 instead of Rs 2,50,000. If the investor repeats this exercise every financial year, the cost basis gradually ratchets upward, and the eventual taxable gain when the full position is finally sold is substantially reduced.

Use our LTCG calculator to model the tax impact of different harvesting scenarios.

Set-off rules: Section 70, 71, and 74

The Income Tax Act has specific rules governing how capital losses can be set off against capital gains. Understanding these rules is essential for effective harvesting.

Section 70 — Intra-head set-off: Capital losses from one type of capital asset can be set off against gains from another type within the same head (capital gains). However, long-term capital loss can only be set off against long-term capital gain. Short-term capital loss can be set off against both short-term and long-term capital gains.

This asymmetry is important. If you have both STCL and LTCL, the STCL is more versatile — it can offset either STCG or LTCG. The LTCL can only offset LTCG. Therefore, if you need to choose which loss to harvest, an STCL is generally more tax-efficient than an LTCL of the same amount.

Section 71 — Inter-head set-off: Capital losses cannot be set off against income from other heads (salary, house property, business, other sources). A capital loss of Rs 5 lakh cannot reduce your salary income for tax purposes. The only exception is that house property loss (up to Rs 2 lakh) can be set off against other income under Section 71 — but this is a house property provision, not a capital gains provision.

Section 74 — Carry forward: Capital losses that cannot be fully set off in the year of incurrence can be carried forward for 8 assessment years. Short-term losses carried forward can be set off against both STCG and LTCG in future years. Long-term losses carried forward can only be set off against LTCG. The critical requirement: to carry forward capital losses, the income tax return must be filed on or before the due date (typically 31 July for non-audit individuals). Filing a belated return forfeits the carry-forward right.

Can you set off equity STCL against debt LTCG?

Yes. This is a commonly misunderstood point. The set-off rules operate by type of gain (short-term vs long-term) and not by asset class (equity vs debt). A short-term capital loss from equity shares can be set off against long-term capital gains from debt mutual funds, gold, real estate, or any other capital asset.

This cross-asset-class flexibility creates interesting planning opportunities. For example, if an investor sold a property and booked a long-term capital gain of Rs 20 lakh, short-term losses from equity positions could be harvested and used to reduce the LTCG tax on the property sale. The tax savings could be substantial.

Timing considerations: when to harvest

While tax-loss harvesting can be done at any point during the financial year, there are practical timing considerations:

January to March window: By January, most investors have a clear picture of their realised gains for the financial year. This is the optimal window to assess whether harvesting is needed and how much loss to book. Waiting until the last week of March introduces settlement risk (T+1 settlement means the trade must occur by the last trading day of March).

Market correction opportunities: Sharp market corrections during the year create natural harvesting opportunities — positions that were profitable may suddenly show losses. These corrections are often the best time to harvest because the losses are largest, and if the correction reverses, the repurchase captures the recovery at the lower cost basis.

Financial year boundary awareness: Capital gains and losses are computed per financial year (April to March). A loss booked in March 2026 and a gain booked in April 2026 are in different financial years — the loss from FY 2025-26 cannot automatically offset the gain from FY 2026-27 unless it is carried forward through a timely filed ITR.

Transaction costs and practical limits

Tax-loss harvesting is not cost-free. Each redemption-and-repurchase cycle involves:

• Brokerage: Discount brokers charge Rs 20 per order (or less), making this relatively cheap.
• Securities Transaction Tax (STT): 0.1% on sell side for delivery-based equity trades.
• Exchange charges, SEBI turnover fee, GST: Small but non-zero.
• Stamp duty: 0.015% on the sell side, 0.015% on the buy side (state-dependent).
• Price slippage: The repurchase price may differ from the sale price due to intraday price movement. For liquid large-cap stocks, this is typically negligible. For illiquid small-caps, it can be material.

As a rule of thumb, the total round-trip cost (sell + repurchase) for a liquid stock through a discount broker was approximately 0.3-0.5% of the transaction value. The tax saving needed to exceed this cost for the harvest to be worthwhile. For small unrealised losses (under Rs 5,000-10,000), the transaction costs may have outweighed the benefit.

A comprehensive annual tax-harvesting checklist

To systematically implement tax harvesting each financial year, the following checklist was useful:

• Review all realised capital gains (STCG and LTCG) by January.
• Identify unrealised losses in the portfolio — categorise by holding period (short-term vs long-term).
• Check if LTCG is approaching or exceeding the Rs 1.25 lakh exemption. If not, consider LTCG gain harvesting to use the exemption.
• If realised gains are substantial, harvest losses to offset. Prioritise STCL (more versatile for set-off) over LTCL.
• Execute sell orders and repurchase if desired (no wash sale restriction in India).
• File ITR before the due date to preserve carry-forward of any unabsorbed losses.
• Document everything — sale date, quantity, price, loss booked, repurchase details.

Frequently asked questions

Does India have wash sale rules?

No. India does not have wash sale rules as of the current tax framework. You can sell a security at a loss and repurchase the same security on the very next trading day (or even the same day) without the loss being disallowed. This makes tax-loss harvesting significantly more straightforward in India than in markets like the US.

Can short-term capital loss from equity offset long-term capital gains from debt?

Yes. Short-term capital loss can be set off against both short-term and long-term capital gains from any asset class — equity, debt, gold, real estate, or any other capital asset. The set-off rules operate by type (short-term vs long-term), not by asset class.

How many years can capital losses be carried forward?

Capital losses can be carried forward for up to 8 assessment years following the year of incurrence. The income tax return must be filed before the due date to preserve the carry-forward right. Filing a belated return forfeits the ability to carry forward capital losses.

What is LTCG harvesting using the Rs 1.25 lakh exemption?

LTCG harvesting (gain harvesting) involves selling long-term equity holdings to book gains up to the Rs 1.25 lakh annual exemption under Section 112A, and then immediately repurchasing the same shares. Since gains up to Rs 1.25 lakh are tax-free, the investor raises the cost basis of their holdings without paying any tax. Repeating this each year gradually reduces the eventual taxable gain.

This article is educational only and does not constitute tax, investment, or financial advice. Tax laws, rates, and exemption limits are subject to change through annual Union Budgets or legislative amendments. The examples and calculations presented are illustrative and may not reflect your specific tax situation. Please consult a qualified chartered accountant or SEBI-registered investment adviser before implementing any tax-harvesting strategy. EquitiesIndia.com is not liable for any reliance placed on this article.