Tax-loss harvesting is the practice of selling investments at a loss to offset capital gains and reduce your tax outgo. Under the current rules (effective 23 July 2024), STCG on listed equity/equity-oriented MFs is 20% and LTCG is 12.5% (equity LTCG taxable above an annual ₹1.25 lakh threshold). Unused capital losses can be carried forward for 8 assessment years if you file your ITR on time. (Income Tax India) (Indian Kanoon, Income Tax Department)
Visual aid: Here’s an Endovia-styled chart showing indicative tax saved by harvesting a ₹1,00,000 loss at 2025 rates.
tax_loss_harvesting_savings.jpg
Why tax-loss harvesting matters in 2025
- Rates changed: From 23-Jul-2024, STCG on listed equity/equity-oriented units under Sec 111A is 20% (earlier 15%). LTCG is 12.5% without indexation, with the equity LTCG threshold raised to ₹1.25 lakh a year (Sec 112A). (Income Tax India)
- Indexation removed for long-term assets transferred on/after 23-Jul-2024, with limited grandfathering for certain land/building cases. (Income Tax India)
- Market context: The 2024 Budget announcement flagged these higher equity CG rates, nudging investors to be more deliberate about timing gains and losses. (Reuters)
What exactly is tax-loss harvesting?
Selling a security/units trading below your purchase price to realize a capital loss, then using that loss to:
- Set off gains in the same year as per the Income-tax Act; and/or
- Carry forward remaining loss for up to 8 AYs to offset future gains (subject to timely ITR filing). (Indian Kanoon, Income Tax Department)
Simple formula:
Tax saved = Harvested loss × Applicable capital-gains tax rate
(ignoring surcharge/cess for simplicity).
How it works — step by step
1) Identify loss-making lots correctly (FIFO)
For securities held in demat, India applies FIFO (First-In-First-Out) to determine which units you sold, which drives holding period and cost. This flows from Sec 45(2A)/CBDT guidance; practical explanations widely reference FIFO for demat sales. (Business Standard, referencer.bcasonline.org)
2) Match gains and losses using set-off rules
- STCL (short-term capital loss) can be set off against both STCG and LTCG.
- LTCL (long-term capital loss) can be set off only against LTCG.
- Losses cannot be set off against salary, interest, etc. If not fully used, carry forward up to 8 AYs (but only if you file the ITR on time for the year of loss—Sec 80 requirement). (Indian Kanoon, Income Tax Department)
One-time relief to watch: A New Income Tax Bill, 2025 proposal allows a single-time flexibility to set off brought-forward LTCL (up to 31-Mar-2026) against STCG from FY 2026-27—subject to enactment. Track final law before relying on it. (The Economic Times)
3) Execute the sale before 31 March
Sell loss positions within the financial year in which you want the set-off. Maintain contract notes and broker statements.
4) Optional: Restore market exposure prudently
India has no explicit “wash-sale” rule like the US; however, transactions solely to obtain a tax benefit can be challenged under GAAR (Chapter X-A) if they lack commercial substance. Many investors leave a reasonable gap or switch to a similar (not identical) exposure (e.g., from a single stock to a sector/index ETF) to show commercial rationale. (cafornri.com, ICAI)
5) File your ITR on time
To carry forward unutilized capital losses, file the relevant year’s ITR within the due date. Late filing can forfeit carry-forward rights. (BDO India, Income Tax Department)
The math — worked examples
Example A: Setting off STCG
- You realized ₹2,50,000 STCG on equity (Sec 111A).
- You harvest ₹1,50,000 STCL.
- Taxable STCG = ₹1,00,000.
- Tax saved ≈ ₹1,50,000 × 20% = ₹30,000 (plus surcharge/cess impact). (Income Tax India)
Example B: Using LTCL against LTCG (Sec 112A)
- You have ₹2,00,000 LTCG on equity units in FY 2025-26.
- The ₹1.25 lakh annual threshold applies; taxable pre-harvest LTCG = ₹75,000.
- You realize ₹75,000 LTCL; taxable LTCG becomes nil; tax saved ≈ ₹75,000 × 12.5% = ₹9,375 (plus surcharge/cess). (Income Tax India)
Set-off & carry-forward at a glance (cheat sheet)
- STCL → set off against STCG or LTCG; carry forward 8 AYs.
- LTCL → set off only against LTCG; carry forward 8 AYs.
- No cross-head set-off (e.g., can’t reduce salary income).
- ITR must be filed on time to carry forward the loss. (Indian Kanoon, Income Tax Department)
Practical tactics (India-specific)
- Switch vs. wait: If you must stay invested, consider shifting from a stock to a broad/sector ETF or a close substitute rather than buying the same security immediately—helps demonstrate commercial intent alongside tax efficiency (GAAR awareness). (ICAI)
- Beware Section 94(8) “bonus stripping”: Since 1-Apr-2023, the scope covers both securities and units; losses engineered around bonus issuances may be disallowed. (AMFI India, Learn by Quicko)
- FIFO discipline: When trimming positions accumulated over time, remember the earliest lots are deemed sold first—this often changes the gain/loss you expected. (Business Standard)
Frequently asked questions
Is there a “wash-sale” rule in India?
No specific wash-sale statute exists. Still, GAAR can override arrangements lacking commercial substance where the main purpose is tax benefit. Keep documentation of your investment rationale, and consider a cool-off period or a substitute instrument. (cafornri.com, ICAI)
How many years can I carry forward capital losses?
Up to 8 assessment years, but only if the ITR for the loss year is filed within the due date. (Indian Kanoon, Income Tax Department)
What are the current equity capital-gains rates?
For transfers on/after 23-Jul-2024: STCG (Sec 111A) = 20%; LTCG (Sec 112A) = 12.5% (equity LTCG taxable above ₹1.25 lakh per FY). Indexation on long-term assets is removed (with limited grandfathering for certain land/building cases). (Income Tax India)
Can I use LTCL against STCG?
Under the current Act, no (LTCL offsets only LTCG). A one-time relaxation has been proposed in the New Income Tax Bill, 2025 for losses up to 31-Mar-2026 effective FY 2026-27, pending enactment. (The Economic Times)
Compliance reminders
- Keep contract notes, demat statements, and a lot-wise capital-gains working (respecting FIFO). (Business Standard)
- Make sure your return is filed on time; otherwise you lose carry-forward benefit. (BDO India)
- Review bonus/dividend stripping provisions before timing purchases/sales around corporate actions. (AMFI India)
Conclusion — When does tax-loss harvesting make sense?
TLH is most valuable when you have meaningful realized gains to offset at 20%/12.5% rates, and when you can maintain your asset allocation via substitutes or a brief re-entry gap without violating commercial-substance principles. Used judiciously—and filed correctly—it can shave thousands off your tax bill while keeping your long-term plan intact. (Income Tax India)