Having a diversified portfolio offers several advantages. It helps balance your investments, provides a sense of security during turbulent market times — since not all your assets are affected simultaneously — and, most importantly, it supports steady growth of your wealth under various market conditions. But have you ever thought about how a diversified portfolio can also help you reduce your long-term capital gains tax? Yes, you heard that right! By using a strategy called tax harvesting, you can lower your tax liability on long-term capital gains.
Let’s understand this strategy! When you strategically sell investments at a loss to offset capital gains and reduce tax liability, this is called tax-loss harvesting. As you realise losses incurred on one or some investments, that can lower your taxable income.
Investors adopt this tax harvesting strategy to save taxes by offsetting long-term capital gains (LTCG) against losses. LTCG tax was introduced in 2018. In the last budget, the government raised the tax exemption limit on LTCG from Rs 1 lakh to Rs 1.25 lakh, while increasing the tax rate from 10% to 12.5%. LTCG refers to the gains made from selling equity shares or other investment assets held for over 12 months.
Niyati Shah, Vertical Head – Personal Tax at 1 Finance, explains, “Tax harvesting is about unlocking the tax-free LTCG limit of Rs 1.25 lakh each year. It’s a proactive approach to ensure tax savings while keeping your portfolio balanced.”
Case Study: Real-life savings
Shobhita V., a tech professional, had unrealized gains of Rs 2.75 lakh in her equity mutual funds at the end of FY 2024-25. She sold units with Rs 1.25 lakh in gains to claim the tax exemption. By reinvesting the proceeds in the same fund, she maintained her portfolio allocation while resetting the purchase price to the current market value. This strategic move saved her Rs 15,625 in taxes (12.5% of Rs 1.25 lakh) and reduced her future tax burden.
Shah adds, “Tax harvesting is especially effective in years when markets are volatile. It allows investors to lock in gains without losing out on future growth potential.”
How to leverage tax harvesting
Evaluate Your Portfolio: Identify equity investments with significant unrealized gains.
Sell Strategically: Sell enough to realize gains within the Rs 1.25 lakh exemption limit.
Reinvest Immediately: Repurchase the same or alternative assets to maintain your portfolio balance.
Repeat Annually: Make this a year-end habit for consistent tax savings.
Also read: Are taxpayers allowed to switch tax regime after mid-year budget changes?
Tax-Loss Harvesting: Turning losses into gains
“By using tax-loss harvesting, investors can turn losses into tax savings. Any unutilized losses can even be carried forward for up to 8 years to offset future capital gains,” says Shah.
Case Study: Offset losses
Amit P. faced a Rs 40,000 loss on a mutual fund while earning Rs 70,000 in LTCG from another fund. By selling the underperforming fund, he offset the loss, reducing his taxable gain to Rs 30,000. This move cut his tax from Rs 8,750 to Rs 3,750, saving Rs 5,000. Amit then reinvested the proceeds, aligning his portfolio for better performance while leveraging tax-loss harvesting to reduce his tax bill.
Conclusion:
Tax harvesting is more than just a tax-saving strategy — it’s a smart financial planning tool that can make your investments work harder for you.
Shah emphasises, “With careful planning and regular utilization of tax harvesting, investors can build wealth more efficiently and ensure their financial goals are met.”
As 2025 unfolds, let this be the year you make your investments smarter, not just bigger. A little planning today can lead to significant savings tomorrow.