Tax Loss Harvesting in India: An Effective Tax-Saving Strategy

Introduction

What is Tax Loss Harvesting?

Tax Loss Harvesting is a smart investment strategy where investors sell loss-making assets to offset capital gains earned from profitable investments. This technique helps reduce the overall tax liability by using realized losses to balance out gains.

For instance, if an investor earns a profit on one stock but incurs a loss on another, the loss can be used to offset the gain, thus reducing the taxable amount. If the losses exceed the gains, the surplus can be carried forward to future years, as per Indian tax laws

How Does Tax Loss Harvesting Work?

Tax Loss Harvesting typically involves the following four steps:

Identifying Underperforming Assets
Review your investment portfolio to identify securities that have significantly dropped in value and show limited potential for recovery.
Selling to Realize Losses
Sell the selected assets to book a capital loss. This realized loss becomes available for offsetting gains.
Offsetting Capital Gains
- Short-Term Capital Loss (STCL): Can be adjusted against both short-term and long-term capital gains.
- Long-Term Capital Loss (LTCL): Can only be adjusted against long-term capital gains.
Carrying Forward Unused Losses
If your total capital losses exceed your gains in a financial year, you can carry forward the remaining loss for up to 8 assessment years, provided you report it in your Income Tax Return (ITR).

Rules for Setting Off Capital Losses in Tax-Loss Harvesting

To effectively reduce your tax liability using Tax Loss Harvesting, it’s crucial to understand the rules for setting off capital losses. These rules differ for short-term and long-term capital assets.

1. Short-Term Capital Loss (STCL) Offset Rules

Applicable Assets: Equity shares and equity-oriented mutual funds held for 12 months or less.
Tax Rate on Gains: 15% under Section 111A of the Income Tax Act.
Set-Off Rules:
STCL can be set off against both:
- Short-Term Capital Gains (STCG)
- Long-Term Capital Gains (LTCG)
Important Note: STCG on securities sold before July 23, 2024, continues to be taxed at 15%.

2. Long-Term Capital Loss (LTCL) Offset Rules

Applicable Assets: Listed equity shares and equity-oriented mutual funds held for more than 12 months.
Tax Rate on Gains:
LTCG above ₹1.25 lakh taxed at 12.5% under Section 112A, without indexation benefits.
Set-Off Rules:
LTCL can be set off only against LTCG.
It cannot be adjusted against STCG.
Exemption Limit: LTCG up to ₹1.25 lakh per financial year is tax-free.
Important Note: For securities sold before July 23, 2024, LTCG over ₹1 lakh was taxed at 10%.

3. Carry Forward Rules for Capital Losses

If your capital losses are more than your capital gains in a given financial year, the excess loss can be carried forward:

Carry Forward Period: Up to 8 assessment years.
Eligibility:
Losses must be declared in your Income Tax Return (ITR) filed before the due date.
Future Set-Off:
- STCL can be set off against STCG or LTCG
- LTCL can be set off only against LTCG

Capital Loss Set-Off Summary Table

Type of Capital Loss	Can Be Set Off Against	Carry Forward Allowed	Carry Forward Period
Short-Term Capital Loss (STCL)	STCG and LTCG	Yes	Up to 8 assessment years
Long-Term Capital Loss (LTCL)	Only LTCG	Yes	Up to 8 assessment years

Tax Loss Harvesting Example: How Arjun Saved ₹20,000 in Taxes

Arjun had made profits on some investments but was also holding a few loss-making assets. By applying Tax Loss Harvesting (TLH), he was able to reduce his total tax liability.

Before Applying Tax Loss Harvesting

Type of Gains/Losses	Calculation	Tax Rate	Tax Liability
Short-Term Capital Gains (STCG)	₹3,50,000 × 20%	20%	₹70,000
Long-Term Capital Gains (LTCG)	(₹8,00,000 – ₹1,25,000) × 12.5%	12.5%	₹84,375
Short-Term Capital Loss (STCL)	₹1,00,000	N/A	–
Total Tax Liability			₹1,54,375

After Applying Tax Loss Harvesting

Arjun sold a poorly performing stock, realizing a short-term capital loss of ₹1,00,000. He offset this loss against his STCG, reducing his taxable gain.

Type of Gains/Losses	Calculation	Tax Rate	Tax Liability
Adjusted STCG	(₹3,50,000 – ₹1,00,000) × 20%	20%	₹50,000
LTCG	(₹8,00,000 – ₹1,25,000) × 12.5%	12.5%	₹84,375
Total Tax Liability			₹1,34,375

Tax Savings from Tax Loss Harvesting

Scenario	Total Tax Liability
Before TLH	₹1,54,375
After TLH	₹1,34,375
Tax Saved	₹20,000

Who Should Use Tax Loss Harvesting?

Tax Loss Harvesting (TLH) isn’t just for seasoned investors—it can benefit a wide range of individuals aiming to reduce their capital gains tax. Here’s who should consider using this smart tax-saving strategy:

High Net-Worth Individuals (HNIs)

Ideal for those with substantial capital gains from stocks, mutual funds, or other assets.
TLH helps offset gains, significantly lowering taxable income.

Frequent Traders & Active Investors

Those who regularly buy and sell equities or mutual funds often incur both profits and losses.
TLH helps minimise tax impact, especially on high-tax short-term gains.

Long-Term Investors & Portfolio Managers

Individuals managing diversified portfolios with a mix of profitable and underperforming assets.
Can strategically sell loss-making holdings to reduce taxable long-term gains.

Taxpayers with Carry-Forward Capital Losses

If you have past capital losses, you can carry them forward for up to 8 assessment years.
TLH helps optimise the use of these losses against future gains.

Mutual Fund Investors

Especially those with capital gains from equity-oriented mutual funds.
Can harvest losses from poorly performing funds to offset those gains.

Investors Facing Short-Term Capital Gains (STCG)

Since STCG is taxed at 15% in India, it can add up quickly.
TLH allows offsetting these gains with short-term losses, lowering the tax bill.

Those Rebalancing Their Portfolios

Investors reshuffling portfolios to align with goals or risk appetite.
TLH enables tax-efficient exits from underperforming assets during rebalancing.

Investors in a Declining Market

During downturns, asset values often drop.
TLH lets investors strategically realise losses to reduce taxes without disrupting long-term plans.

When Should You Use the Tax-Loss Harvesting Strategy?

Tax-loss harvesting is most effective when timed strategically. Here are key scenarios when using this approach can significantly reduce your tax liability:

1. When You Have Capital Gains to Offset

If you’ve realised profits from selling shares, mutual funds, or other capital assets, selling loss-making investments can help offset those gains—reducing your overall tax burden.

2. During a Market Downturn

When markets dip and some of your holdings are in the red, it’s a smart time to book losses. Selling underperforming assets can turn temporary setbacks into tax-saving opportunities.

3. Before the Financial Year-End

To claim losses for the current financial year, tax-loss harvesting must be done before the last trading day.
For FY 2024–25, complete your transactions by March 28, 2025, as markets will be closed on March 29, 30, and 31.

4. When You Have Short-Term Gains

Since short-term capital gains (STCG) are taxed at a higher rate (15%), offsetting them with short-term capital losses (STCL) can result in immediate and substantial tax savings.

5. To Carry Forward Excess Losses

If your losses exceed your gains in a financial year, the remaining loss can be carried forward for up to 8 assessment years. These carried-forward losses can then be used to offset future gains, providing long-term tax efficiency

Key Benefits of Tax Loss Harvesting

Tax loss harvesting offers more than just tax relief—it brings several strategic advantages for investors. Here’s how it can benefit you:

Lower Your Tax Liability

By offsetting capital losses against capital gains, tax loss harvesting reduces your taxable income, resulting in a lower overall tax liability.

Carry Forward Unused Losses

If you’re unable to offset all your losses within the current year, you can carry forward both Short-Term Capital Losses (STCL) and Long-Term Capital Losses (LTCL) for up to 8 assessment years, allowing you to offset future capital gains.

Offset Both Short-Term and Long-Term Gains

STCL can be applied to both Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG), offering enhanced flexibility.
LTCL can only be used against Long-Term Capital Gains, ensuring tax efficiency for long-term investments.

Rebalance Your Portfolio

Tax loss harvesting provides an opportunity to sell underperforming assets, not only reducing your tax burden but also allowing you to reinvest in better-performing assets, ultimately enhancing your portfolio performance.

Key Considerations for Tax Loss Harvesting

Timing is essential when it comes to tax loss harvesting. Selling underperforming assets at the wrong moment can undermine potential tax benefits and even lead to avoidable losses.

Given the complexity of tax loss harvesting, consulting with tax experts is highly recommended. This ensures compliance with tax regulations and helps you maximise your tax savings.

Additionally, it’s important to understand whether an asset qualifies as short-term or long-term, based on its holding period. This classification affects how the capital gain or loss is treated and determines the most effective way to offset it

Maximise Your Tax Savings with Expert Guidance!

Need assistance in implementing tax loss harvesting strategies? Our Chartered Accountants (CAs) are here to help you optimise your tax savings. Don’t wait until the last minute—start planning your tax strategy today!

About the Author

Manisha

Manisha is an experienced writer known for simplifying complex legal concepts into clear, practical guidance. Her work empowers entrepreneurs with the knowledge they need to navigate the intricacies of business laws, helping them successfully launch and manage their businesses.

June 25, 2025