Tax-loss harvesting (TLH) is the deliberate selling of loss-making investments to crystallise capital losses that can be set off against capital gains, reducing the tax bill. In India, the mechanism is governed by Section 70 / 71 / 74 of the Income Tax Act.
Indian set-off rules: (a) Short-term capital loss (STCL) can be set off against both STCG and LTCG; (b) Long-term capital loss (LTCL) can be set off only against LTCG; (c) Unutilised losses can be carried forward 8 assessment years, subject to filing ITR before the due date; (d) Losses cannot be set off against salary or business income.
Unlike the US, India does not have a "wash-sale rule" for equities — you can sell and immediately rebuy the same security. (Be cautious: while the Income Tax Act does not have a wash-sale clause, GAAR can be invoked for blatant tax-driven sham trades; practical risk is low for retail-scale activity.)
Common TLH actions: (i) In a year with high LTCG, sell long-term losers to bring net LTCG below the Rs 1.25 lakh exemption; (ii) At year-end, sell short-term losers to offset existing STCG; (iii) For tax-loss carry-forward, file ITR even in loss years so future gains can be sheltered.
Example 1: Investor has Rs 4 lakh LTCG from selling Stock A in March 2027. They also hold Stock B at Rs 3 lakh LTCL. By selling Stock B, the LTCG drops to Rs 1 lakh — below the Rs 1.25 lakh exemption — so total LTCG tax = 0. They can immediately rebuy Stock B if conviction persists.
Example 2: A trader has Rs 2 lakh STCG and Rs 1 lakh STCL through the year. The STCL fully offsets Rs 1 lakh of STCG, reducing tax base to Rs 1 lakh STCG @20% = Rs 20,000 tax saved.
Timing: TLH should be reviewed in Jan-Mar each year; transactions must settle on T+1 within the financial year.
Disclaimer: Educational content from MintByte (ARN-314872, MFD). Examples are illustrative. SEBI Investment Adviser registration is in process; we do not provide personalized tax-planning advice. Tax laws can change; consult a CA.