As the financial year draws to a close, investors are once again looking for ways to optimise their tax outgo before the March 31 deadline. One strategy that often comes into focus during this period is tax harvesting—a
legal and widely used method to reduce capital gains tax liability.
What is tax harvesting?
Tax harvesting, often referred to as tax-loss harvesting, involves selling investments that are currently at a loss to offset gains made elsewhere in the portfolio. By booking these losses before the end of the financial year, investors can reduce their overall taxable capital gains.
For instance, if an investor has made gains from selling certain stocks or mutual funds, they can sell underperforming assets to realise losses. These losses can then be set off against gains, thereby lowering the total tax payable.
How does it work?
Capital gains are broadly divided into short-term and long-term, each taxed differently. Short-term capital gains (STCG) on equities are taxed at 15%, while long-term capital gains (LTCG) above Rs 1 lakh are taxed at 10% without indexation.
Tax harvesting also allows investors to strategically realise gains within the tax-free threshold. For example, investors sitting on long-term gains within the exempt limit can sell and immediately repurchase the same securities. This resets the purchase price higher while keeping the gains tax-free, helping reduce future tax liability.
Similarly, realised losses can be carried forward for up to eight assessment years, provided they are reported in the income tax return filed within the due date.
How much can be harvested before March 31, 2026?
According to Balwant Jain, a Mumbai-based CA and CFP, investors can use tax harvesting to fully utilise the tax-free limit on long-term capital gains before the financial year ends.
“Tax harvesting for claiming initial Rs 1.25 lakh of tax-free LTCGs can be done by March 31. If you book higher LTCGs, you will have to pay tax at a flat rate of 12.5% on the remaining amount,” he told Moneycontrol.
He added that when it comes to booking capital losses, investors can realise losses up to the amount of gains already booked so that these can be set off efficiently. “Even if you book higher capital loss, the unabsorbed loss can be carried forward for set-off against capital gains in subsequent years,” he said.
Key rules to keep in mind
While tax harvesting is straightforward in principle, there are a few important rules investors must follow:
- Set-off rules: Short-term capital losses can be set off against both STCG and LTCG, whereas long-term capital losses can only be set off against LTCG.
- Carry forward losses: Unused losses can be carried forward for eight years but must be declared in the tax return.
- Wash sale caution: Although India does not have strict “wash sale” rules like some countries, frequent buy-sell transactions purely to avoid taxes may attract scrutiny.
Why it matters this year
With markets witnessing bouts of volatility and uneven performance across sectors, many portfolios are likely to have a mix of gains and losses. This makes the current environment particularly conducive for tax harvesting.
At the same time, global uncertainties and fluctuating interest rate expectations have kept sentiment fragile. Investors who actively review their portfolios can use this volatility to their advantage by trimming underperforming assets and optimising their tax position.
Points of caution
Experts caution that tax harvesting should not be driven solely by tax considerations. Selling quality investments just to book losses may hurt long-term returns if those assets recover later.
Additionally, transaction costs, exit loads in mutual funds, and the impact on asset allocation should be factored in before making any moves.
Tax harvesting is a useful tool for investors looking to reduce their capital gains tax liability before March 31. When used judiciously, it can improve post-tax returns without disrupting long-term investment goals.
However, it works best as part of a broader financial strategy rather than a last-minute tax-saving exercise. Reviewing your portfolio, understanding the rules, and acting in time can help make the most of this opportunity before the financial year ends.
