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What Is Tax Loss Harvesting? Meaning & Example

A plain-English definition of Tax Loss Harvesting: what it means, how it works, and a simple example.

Quick answer

Tax loss harvesting is the strategy of selling investments at a loss to offset capital gains and reduce your tax liability in India.

Tax loss harvesting is the practice of deliberately selling an investment that is currently at a loss so that the realised loss can be set off against capital gains from other investments, reducing your overall tax liability. It is not about accepting permanent losses; you typically reinvest the proceeds in a similar but not identical asset to maintain your market exposure.

How it works in India

Under the Income Tax Act, capital losses can be set off against capital gains in the same financial year, subject to these rules:

  • Short-term capital loss can be set off against both short-term and long-term capital gains from any asset class.
  • Long-term capital loss can be set off only against long-term capital gains.
  • Unabsorbed capital losses can be carried forward for up to 8 assessment years and set off in future years, provided you file your ITR by the due date.

A practical example

You hold two equity mutual funds. Fund A has an unrealised gain of Rs 2,00,000 and Fund B has an unrealised loss of Rs 80,000. If you redeem both: - Total long-term capital gains: Rs 2,00,000. - Set off with loss: Rs 80,000. - Net taxable LTCG: Rs 1,20,000. - After the Rs 1,25,000 annual exemption for equity LTCG, taxable gain: nil.

Without harvesting the loss, you would have paid tax on Rs 75,000 (Rs 2,00,000 minus the Rs 1,25,000 exemption). The loss in Fund B was going to be realised eventually anyway; you simply chose to time it alongside a gain.

The equity LTCG exemption angle

Equity mutual fund and stock gains up to Rs 1,25,000 per year are exempt from long-term capital gains tax. A common year-end strategy is:

  1. If you have equity holdings with gains above Rs 1,25,000 that you plan to book, look for holdings with unrealised losses.
  2. Sell the loss-making holdings before 31 March.
  3. Set off the losses against the gains.
  4. Reinvest the proceeds in a similar fund after a reasonable gap to avoid the transaction being treated as a sham.

Watch out for wash sales

India does not have an explicit wash-sale rule like the US, but the Income Tax Department can disallow a loss if the same asset is sold and repurchased in a manner that suggests the transaction had no commercial substance other than generating a tax loss. To be safe: - Wait a few days before reinvesting. - Consider switching to a similar but different fund, such as moving from one index fund to another that tracks a different index.

When harvesting makes sense

  • At financial year-end when you can see your full capital gains picture.
  • When you hold a poorly performing fund you were planning to exit anyway.
  • When the tax saved exceeds the transaction costs (exit loads, expense ratios, brokerage).

Tax loss harvesting is a tax management technique, not an investment strategy. It should never lead you to sell a good investment purely for the loss. Use our Income Tax calculator to estimate how much tax a harvested loss would actually save.

Tax Loss Harvesting FAQs

The questions people most often ask about Tax Loss Harvesting, answered for Indian readers.

Is tax loss harvesting legal in India?

Yes. Selling an investment at a loss to offset capital gains is entirely legal under the Income Tax Act. The Act explicitly provides for set-off and carry-forward of capital losses. However, artificial transactions with no commercial substance other than generating losses can be questioned by the tax authorities.

Can I carry forward capital losses in India?

Yes. Unabsorbed capital losses can be carried forward for up to 8 assessment years, provided you file your income tax return by the due date. Short-term losses carried forward can offset future short-term or long-term gains. Long-term losses can only offset future long-term gains.

Can I set off losses from one asset class against another?

Short-term capital losses can be set off against both short-term and long-term capital gains from any capital asset, including equity, debt, property or gold. Long-term capital losses can only be set off against long-term capital gains. Losses cannot be set off against salary or business income.

Does India have a wash-sale rule?

India does not have a statutory wash-sale rule like the US. However, the Income Tax Department can invoke the general anti-avoidance rule or disallow losses from transactions that appear to have no genuine commercial purpose. A brief gap before reinvesting and choosing a different but similar fund is prudent.

When is the best time for tax loss harvesting?

Financial year-end, particularly February and March, is the most common period because you can see your full-year capital gains picture. However, you can harvest losses at any time during the year if a holding is in loss and you have realised or expect to realise gains in the same year.

Put Tax Loss Harvesting into practice

Try the tool or guide most relevant to this term.

Income Tax Calculator

Related terms

Capital GainsMutual FundIndex FundIncome Tax Return (ITR)ELSS

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A note on accuracy: this definition is for general education, not personalised financial or tax advice. Figures are illustrative and rules can change. Confirm anything that affects a real decision.