Tax season is here, and every investor looks for ways to reduce tax liabilities. One lesser-known but highly effective strategy is Tax Loss Harvesting (TLH). This strategy allows investors to offset capital gains by selling loss-making investments. If you’re wondering how this works and whether it’s legal in India, this article will simplify the concept for you.
What is Tax Loss Harvesting?
Tax Loss Harvesting is a strategic investment practice where investors sell underperforming assets at a loss to offset taxable capital gains. This approach helps reduce overall tax liability by balancing gains with losses, ultimately lowering the investor’s tax burden.
For example, if an investor makes a profit on one stock but incurs a loss on another, they can use the loss to reduce the taxable gain. If losses exceed gains, the excess can be carried forward to offset future gains as per tax regulations.
How Does Tax Loss Harvesting Work?
Tax Loss Harvesting follows a simple 4-step process:
- Identifying Loss-Making Assets – Reviewing the portfolio and selecting assets that have significantly declined in value and are unlikely to recover.
- Selling & Booking Losses – Selling these assets to realise a capital loss.
- Offsetting Gains – Applying these losses to reduce taxable capital gains:
- Short-term capital losses (STCL) can be used to offset both Short-Term (STCG) and Long-Term Capital Gains (LTCG).
- Long-term capital losses (LTCL) can only be used to offset LTCG.
- Carrying Forward Excess Losses – If total losses exceed gains in a financial year, the remaining loss can be carried forward for up to 8 assessment years, provided it is declared in the Income Tax Return (ITR).
By following this method, investors can effectively lower their tax burden while keeping their investment portfolio optimised.
Rules for Setting Off Capital Losses in Tax Loss Harvesting
Short-Term Capital Gains (STCG) Offset Rules
- STCL can be adjusted against both STCG and LTCG.
- Applies to: Equity shares and equity-oriented mutual funds held for 12 months or less.
- Tax Rate: 15% under Section 111A of the Income Tax Act.
- Important Update: For securities sold before July 23, 2024, STCG will still be taxed at 15%.
Long-Term Capital Gains (LTCG) Offset Rules
- LTCL can only be adjusted against LTCG. LTCL cannot be offset against STCG.
- Applies to: Listed equity shares and equity-oriented mutual funds held for more than 12 months.
- Tax Rate: Gains exceeding ₹1.25 lakh are taxed at 12.5% under Section 112A, without indexation benefits.
- Exemption: LTCG up to ₹1.25 lakh per financial year is tax-free.
- Important Update: For securities sold before July 23, 2024, LTCG exceeding ₹1 lakh was taxed at 10%.
Carry Forward Rule
- Unused capital losses can be carried forward for up to 8 assessment years.
- To claim this benefit, losses must be reported in the Income Tax Return (ITR) before the due date.
- These carried-forward losses can be set off against eligible capital gains in future years, helping reduce tax liability over time.
| Type of Capital Loss | Can Be Offset Against | Is Carry Forward Allowed? | Carry Forward Period |
| Short-Term Capital Loss (STCL) | Both 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
Arjun had gains from stocks and mutual funds but also held some loss-making investments. By using Tax Loss Harvesting (TLH), he reduced his overall tax burden.
Before Tax Loss Harvesting
| Type of Gains/Losses | Calculation | Tax Rate | Total 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 Tax Loss Harvesting
| Type of Gains/Losses | Calculation | Tax Rate | Total Tax Liability |
| Short-Term Capital Gains (STCG) (Adjusted) | (₹3,50,000 – ₹1,00,000) × 20% | 20% | ₹50,000 |
| Long-Term Capital Gains (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
| Before TLH | After TLH | Total Tax Savings |
| ₹1,54,375 | ₹1,34,375 | ₹20,000 |
By using Tax Loss Harvesting, Arjun successfully saved ₹20,000 in taxes while keeping his portfolio optimized.
Who Should Consider Tax Loss Harvesting?
- High Net-Worth Individuals (HNIs) with significant capital gains.
- Frequent Traders & Active Investors balancing short-term profits and losses.
- Long-Term Investors & Portfolio Managers looking to optimize their holdings.
- Taxpayers with Carry-Forward Losses offsetting previous losses.
- Mutual Fund Investors reducing taxable gains.
- Investors Facing Short-Term Capital Gains (STCG) Taxes, taxed at 15%.
- Those Rebalancing Their Portfolio while minimizing tax impact.
- Investors in a Falling Market leveraging losses to reduce tax burdens.
Maximise Your Tax Savings with Expert Guidance!
Need help implementing tax loss harvesting strategies effectively? Our CAs at Wallet4Wealth are here to guide you in optimising your tax savings. Don’t wait until the last date to file your ITR—take action today!
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This blog is purely for educational purposes. Mutual fund investments are subject to market risks, read all scheme-related documents carefully.
