For equity investors, tax harvesting before March 31 is one of the most effective ways to optimise tax liability. Regular harvesting helps prevent large gains from building up and becoming taxable in future years.
If investors do not go for tax harvesting every year, they will pay more tax over time, as long-term gains accumulate beyond the annual exemption limit of Rs 1.25 lakh. Investors also miss the opportunity to utilise available capital losses, which, if not harvested in time, cannot be set off in the current year.
Harvesting gains
Tax harvesting involves selling shares or equity mutual funds to book gains or losses, and subsequently reinvesting. Short-term capital losses (STCL) can be set off against any capital gains, while long-term capital losses (LTCL) can be set off only against long-term capital gains (LTCG). STCG (holdings less than 12 months) is taxed at 20% and LTCG (holdings over 12 months) over Rs 1.25 lakh at 12.5%, without indexation.
For instance, if an investor has made LTCG of Rs 1,90,000 on listed equities in FY 2025-26, only gains of Rs 65,000 attracts 12.5% tax. Again, if one stock generates a short-term gain of Rs 30,000 and another in a short-term loss of Rs 25,000, selling both leads to a net taxable gain of only Rs 5,000. This reduces the tax payable for the year and allows better use of losses for tax planning.
“Doing this before March 31 ensures that the benefits, whether in the form of lower taxable gains or usable carried-forward losses, are captured in that financial year,” says Sandeep Sehgal, partner, Tax, AKM Global, a tax and consulting firm.
Investors can undertake tax harvesting in debt products. However, the nature of tax benefits differs as gains from debt mutual funds ) are taxed at the investor’s applicable income-tax slab rate.
Capital loss
If an investor does not adopt tax loss harvesting, capital losses that would have been otherwise available to set-off capital gains remain unutilised, directly reducing post-tax returns. Timing of set-off is critical; else, the investor may continue to pay taxes on the capital gains and ultimately capital losses accumulated may lapse without giving benefit of any set-off as permissible under income tax laws.
From an investment perspective, ignoring tax harvesting can lead to inefficient portfolio decisions. “Investors may continue to hold underperforming assets to avoid booking losses, which can delay necessary portfolio rebalancing and affect overall portfolio efficiency,” says Abheet Sachdeva, partner, Nangia Global. So, ignoring tax loss harvesting over the long term may result in weaker post-tax wealth creation, even when pre-tax portfolio performance is strong.
Carry forward of losses
Any unabsorbed LTCL can be carried forward for eight assessment years, subject to filing the income tax return within the prescribed timelines. Losses must be realised, which means that the sale must occur before March 31 to reflect in the same financial year.
Reinvesting gains
The reinvestment of tax-harvested gains varies widely across investors and depends on their risk appetite, tax profile and investment horizon. Ideally, the harvested gains should be invested in tax-efficient instruments such as National Pension System, public provident fund or Sukanya Samriddhi Account for compounding benefits and tax exemption at the time of maturity.