Tax-loss harvesting in India: how it works and when to use it

The current tax rates on equity

For listed equity shares and equity mutual funds, gains on holdings of more than 12 months are long-term capital gains (LTCG), taxed at 12.5% on the amount above the ₹1.25 lakh annual exemption. Gains on holdings of 12 months or less are short-term capital gains (STCG), taxed at 20%.

Those rates are what make harvesting worthwhile: every rupee of gain you offset with a loss is a rupee taxed at 0% instead of 12.5% or 20%.

The set-off rules (this is the part people get wrong)

Indian tax law is asymmetric about which losses can offset which gains. Short-term capital losses are flexible: they can be set off against both short-term and long-term capital gains. Long-term capital losses are restricted: they can only be set off against long-term capital gains.

If your losses exceed your gains in a year, the unused losses aren't wasted — they carry forward for up to 8 assessment years. But there's a catch that trips up thousands of investors: you must file your income tax return by the due date to preserve the carry-forward. Miss the deadline and the losses lapse.

A worked example

Say that during the year you booked ₹3,00,000 of long-term gains on equity funds and you're sitting on a stock with a ₹80,000 unrealised loss you no longer believe in.

Without harvesting: your taxable LTCG is ₹3,00,000 minus the ₹1,25,000 exemption = ₹1,75,000, and tax at 12.5% is ₹21,875.

With harvesting: sell the loser, realising the ₹80,000 loss. Taxable LTCG becomes ₹3,00,000 − ₹80,000 − ₹1,25,000 = ₹95,000, and tax drops to ₹11,875. The harvest saved you ₹10,000 — from a position you didn't want anyway.

Timing and pitfalls

Harvesting must happen before the financial year ends on March 31 — you can't apply this year's losses to last year's gains. Most investors review in February or March, but checking quarterly avoids a last-minute scramble.

Watch the traps: don't sell a fundamentally sound investment just to book a loss (the tax saving rarely beats the recovery you give up); remember exit loads and STT eat into the benefit on small positions; and if you rebuy the same security, you take on price risk while you're out of the market. India has no explicit 'wash-sale' rule like the US, but rebuying instantly purely to manufacture a loss can invite scrutiny under general anti-avoidance provisions — when in doubt, ask a CA.

Where Money Co-Pilot helps

The hard part of harvesting isn't the concept — it's noticing the opportunity across every account before March 31. Money Co-Pilot's AI Tax Insights watches your connected portfolios, flags harvestable losses against your realised gains, and shows the estimated saving for each opportunity, so the decision lands in front of you while there's still time to act.