Tax Loss Harvesting in Indian Capital Markets: Understanding the Concepts and Compliance

Introduction

Investing in the capital markets is not only about maximizing gains but also about minimizing taxes wherever legally possible. One such smart tax-saving strategy is tax loss harvesting.

Before understanding tax loss harvesting, let's get familiar with Capital gains. When you sell an equity investment for more than what you paid for it, the profit you make is called a capital gain.

There are two types of capital gain:

Short-Term Capital Gain (STCG)	Long-Term Capital Gain (LTCG)
Held for less than 12 months	Held for more than 12 months
Tax Rate: 20% (plus surcharge & cess)	Tax Rate: 12.5% (on gains above ₹1.25 lakh)

What is Tax Loss Harvesting?

Tax loss harvesting means selling an investment that has gone down in value (Incurring a loss) to reduce your overall tax bill. You use the loss from that sale to cancel out the profit (capital gain) you made from other investments. This is exactly like using a coupon to reduce your grocery bill, but instead of a coupon, you are using the loss that you have incurred from your previous investments.

Let me give you an example,

Imagine you have two investments:

Stock A:

• Bought at: ₹1,00,000

• Sold at: ₹1,50,000

• Capital Gain: ₹50,000

Stock B:

• Bought at: ₹1,00,000

• Current Value: ₹60,000

• Unrealized Loss: ₹40,000

• You haven’t sold it yet.

What You Can Do (Tax Loss Harvesting):

Before the financial year ends (March 31), you sell Stock B and realize the ₹40,000 loss.

• Now, your total capital gain = ₹50,000 (from A)

• You offset/reduce it with ₹40,000 loss (from B)

• So, taxable gain = ₹10,000 instead of ₹50,000

• This reduces your tax liability significantly.

If you still believe in Stock B’s future, you can buy it back after a short gap.

What is Tax Loss Harvesting?

Is Tax Loss Harvesting Legal in India?

Yes, tax loss harvesting is completely legal in India , when done correctly under the rules of the Income Tax Act, 1961.

What Makes It Legal? Income Tax Department allows you to set off (adjust) capital losses against capital gains:

• Short-Term Capital Loss (STCL):

  • Can be adjusted against both STCG and LTCG

• Long-Term Capital Loss (LTCL):

  • Can be adjusted only against LTCG

If your losses are more than your gains, you can carry forward the unused losses for up to 8 years — again, totally legal as long as you declare them in your ITR (Income Tax Return).

Tax Loss Harvesting with ETFs and Mutual Funds in India

Tax loss harvesting isn’t limited to individual stocks — you can also apply this strategy to ETFs and mutual funds in India. In fact, these instruments are often ideal for harvesting because they are diversified and have multiple alternatives available.

How It Works:

If you hold a mutual fund or ETF that is currently at a loss, you can sell it to realize that loss and offset gains you’ve made elsewhere in your portfolio (from selling other mutual funds, stocks, or ETFs at a profit).

After selling the loss-making fund:

• You can reinvest in a similar but not identical fund to maintain your asset allocation.

• This way, you stay invested while still taking advantage of the tax benefit.

Conclusion

Tax loss harvesting is a smart and legal strategy that allows investors to make the most of their capital market losses by reducing their overall tax burden. By carefully timing the sale of underperforming assets and offsetting them against realized gains, investors can enhance their post-tax returns without compromising long-term financial goals.

However, tax loss harvesting should not be done blindly. It requires a balance between tax efficiency and portfolio strategy. This is where a qualified investment advisory service can make a significant difference by helping you identify the right opportunities, avoid common pitfalls, and ensure compliance with tax laws.

FAQs

Can I offset long-term capital loss against short-term capital gain?

No, long-term capital loss can only be set off against long-term capital gains. But short-term capital losses can be used to offset both short-term and long-term gains.

What is the limit for tax-loss harvesting in India?

There is no specific monetary limit. You can harvest any amount of losses, but you must follow the set-off and carry-forward rules. Also, unused losses can be carried forward for up to 8 years.

What types of investments can I use for tax loss harvesting?

You can apply tax loss harvesting to:

• Stocks

• Equity mutual funds

• ETFs

• Even debt funds and real estate, although the rules and tax treatment differ.

• What is the last date to do tax loss harvesting in India?

You must complete tax loss harvesting before March 31 of the financial year. Ideally, sell loss-making assets a few days before this date to ensure timely settlement and avoid missing the deadline.

What is the last date to do tax loss harvesting in India?

You must complete tax loss harvesting before March 31 of the financial year. Ideally, sell loss-making assets a few days before this date to ensure timely settlement and avoid missing the deadline.

Can I buy back the same investment after selling it at a loss?

Technically yes, since India doesn't have a formal wash-sale rule.