Tax-Loss Harvesting in India — How to Save Tax on Stock Losses

Atmabhan Pandit (Shrikant Bhosale)
Founder, TWIST POOL Labs  ·  TAC Research  ·  NanoCERN Unit, Pune
First-principles finance educator  ·  10+ years in Indian capital markets
 ORCID: 0009-0003-1953-7932

Most investors treat investment losses as purely negative events. Smart investors treat them as tax assets. Tax-loss harvesting is the strategy of deliberately realising losses to reduce your capital gains tax — and it is completely legal under the Indian Income Tax Act.

1. The Core Mechanic: How Set-Off Works

Under Indian tax law, capital losses can be set off against capital gains:

Short-Term Capital Loss (STCL) can be set off against:

• Short-Term Capital Gain (STCG) ✅
• Long-Term Capital Gain (LTCG) ✅

Long-Term Capital Loss (LTCL) can be set off against:

• Long-Term Capital Gain (LTCG) only ✅
• Short-Term Capital Gain (STCG) — NOT ALLOWED ❌

Carry-forward: If losses cannot be fully set off in the current year, they can be carried forward for 8 assessment years. The ITR must be filed on time (before due date) to claim this carry-forward right.

2. The Tax-Loss Harvesting Strategy (Step-by-Step)

Step 1: Identify unrealised losses
Go through your demat account / broker P&L. List every holding where current market price < purchase price. Step 2: Calculate the loss
Loss per share × shares held = Unrealised loss

Step 3: Check if you have gains to offset
Do you have any realised capital gains this year (from other sales, MF redemptions, property sale)? These are the gains you want to reduce.

Step 4: Sell the loss-making position
Realise the loss before March 31 (the financial year end). The loss is now “crystallised” for tax purposes.

Step 5: Optional — Re-enter the position
If you still believe in the stock/fund long-term, you can buy it back immediately after selling. There is no “wash sale rule” in India (unlike the US). You can sell today and buy tomorrow at the same price.

Step 6: Claim the loss in ITR
Report in Schedule CG of ITR-2 or ITR-3. The loss will automatically reduce your taxable capital gains.

3. Practical Example

Situation:

• LTCG from selling Infosys shares: ₹3,50,000
• Unrealised loss in Yes Bank shares: ₹1,80,000 (bought 3 years ago)

Without harvesting:

• Taxable LTCG = ₹3,50,000 − ₹1,25,000 (exemption) = ₹2,25,000
• Tax at 12.5% = ₹28,125

With harvesting (sell Yes Bank before March 31):

• LTCG from Infosys: ₹3,50,000
• LTCL from Yes Bank: (₹1,80,000)
• Net LTCG = ₹1,70,000 − ₹1,25,000 (exemption) = ₹45,000
• Tax at 12.5% = ₹5,625

Tax saved: ₹22,500

After selling Yes Bank, you can immediately buy it back if you want to maintain the position. Your new cost price resets to the current market price.

4. LTCG Exemption Harvesting — The Annual ₹1.25 Lakh Free Pass

Even if you have no losses, there is a related strategy: harvest gains up to ₹1.25 lakh every year.

Since LTCG up to ₹1.25 lakh is tax-free, you can sell equity holdings with gains up to this threshold every March and immediately re-buy. Effect:

• Your profit up to ₹1.25 lakh is realised tax-free
• Your cost price resets to current price
• Future LTCG on this investment starts from the higher cost — reducing future tax

This should be done every year without exception. The cumulative effect over 20 years is significant.

5. What NOT to Do

Do not sell just for the tax saving if the exit is wrong fundamentally. Tax saving is a secondary goal. If you believe strongly in a holding, a loss realisation that costs you future gains is not worth the tax saving.

Do not ignore transaction costs. Brokerage, STT, and exit loads on mutual funds reduce the net tax benefit. Calculate the net saving: Tax saved − Transaction costs − Impact cost.

Do not miss the March 31 deadline. Losses realised on or before March 31 reduce that year’s tax. Losses realised on April 1 are next year’s problem.

Summary Checklist: Tax-Loss Harvesting

The Smart Friend’s Verdict

Tax-loss harvesting is a completely legal, consistently overlooked strategy that Indian investors leave on the table every year. The government has given you the right to set off losses against gains. The only requirement is that you do it before March 31 and file your ITR on time.

Spend one hour in February reviewing your portfolio for loss positions. That one hour can save ₹20,000–₹50,000 in tax for a typical equity investor.

Back to Capital Gains Tax in India for the complete framework.

Frequently Asked Questions