What is tax harvesting? Tax-gain and tax-loss harvesting for shares and equity mutual funds
Short answer. Tax harvesting means choosing when to realise gains and losses. Every financial year the first ₹1.25 lakh of long-term gains on listed shares and equity mutual funds is tax-free, so booking gains up to that limit resets your cost with no tax. Booked losses reduce taxable gains, and unused losses carry forward for eight years.
General education on tax rules. It is not investment advice or a recommendation to buy, sell or hold any security.
What are the capital gains rates for FY 2026-27?
| Listed shares and equity-oriented funds (STT paid) | Holding period | Tax rate |
|---|---|---|
| Short-term capital gain (STCG) | 12 months or less | 20% |
| Long-term capital gain (LTCG) | More than 12 months | 12.5% on gains above ₹1.25 lakh in the year |
Add 4% cess, and surcharge where it applies. Sections 196 and 198 of the Income-tax Act, 2025 (formerly s.111A and s.112A). Budget 2026 left these rates unchanged and raised securities transaction tax only on futures and options.
Three points sit behind the table. The ₹1.25 lakh exemption is per person per financial year, across all your listed shares and equity funds together, and it cannot be carried to the next year. The Section 87A rebate does not cover these special-rate gains. And a resident whose other income is below the basic exemption limit can use the unused part of that limit against these gains.
What is tax-gain harvesting?
You sell units or shares held for more than 12 months, keep the long-term gain within ₹1.25 lakh, and buy back. Your holding is the same, but your cost for future tax is now higher.
Worked example. Equity fund units bought for ₹5,00,000 in 2024 are worth ₹6,20,000 in March 2027, and you have no other long-term gains this year.
| Step | Without harvesting | With harvesting |
|---|---|---|
| LTCG booked in FY 2026-27 | Nil | ₹1,20,000 (tax nil, within ₹1.25 lakh) |
| Cost carried forward | ₹5,00,000 | ₹6,20,000 |
| Gain if later sold for ₹8,00,000 | ₹3,00,000 | ₹1,80,000 |
The later gain is ₹1,20,000 smaller. If that slice would otherwise have been taxed, the saving is 12.5% of ₹1,20,000 = ₹15,000, or ₹15,600 with cess. The most this can save one person in one year is 12.5% of ₹1.25 lakh: ₹15,625, or ₹16,250 with cess.
What is tax-loss harvesting, and how does set-off work?
You sell a holding that is below cost so that the loss becomes real for tax, and set it against gains booked in the same year.
| Loss | Can be set off against |
|---|---|
| Short-term capital loss | Short-term and long-term capital gains |
| Long-term capital loss | Long-term capital gains only |
| Any capital loss | Never against salary, interest, rent or business income |
A loss you cannot use this year is carried forward for eight tax years under Section 111 (formerly s.74), on the same terms. The condition is Section 121 (formerly s.80): the return for the loss year must be filed by the due date. A belated return forfeits the carry-forward. Losses brought forward from years under the old Act continue to be available.
Worked example. You have booked ₹2,00,000 of short-term gains on shares this year. Tax at 20% is ₹40,000, or ₹41,600 with cess. Another holding shows a short-term loss of ₹80,000. If you sell it before 31 March, the taxable gain falls to ₹1,20,000 and the tax to ₹24,000, or ₹24,960 with cess. The saving is ₹16,640.
Is tax harvesting worth it? Costs and cautions
- Transaction costs. Delivery trades in shares carry securities transaction tax of 0.1% on both the sale and the repurchase, plus brokerage and stamp duty on the purchase. Equity fund redemptions carry 0.001%.
- Exit loads and lock-ins. Many equity funds charge an exit load on units redeemed within a set period, often a year, and tax-saver (ELSS) units are locked in for three years. Each SIP instalment has its own 12-month clock, and units are treated as sold first-in, first-out.
- Time out of the market. Fund redemption money takes a few days to arrive. The price can move before you reinvest.
- Same-day trades do not work for shares. Selling and buying the same share on the same day in the same account is netted off as an intraday trade. No delivery takes place, so no capital gain or loss is booked.
- Anti-avoidance. India has no wash-sale rule of the kind found in the US, and we are not aware of a provision that disallows a capital loss merely because you bought the holding back. The Act does contain general anti-avoidance rules (GAAR), and courts have long refused to recognise transactions that are a colourable device with no purpose other than avoiding tax. Genuine trades at market prices through the exchange or the fund house, with delivery and a contract note, are ordinary tax planning. Circular or off-market arrangements are not. This is general education; take advice on large or repeated transactions.
- Deadline. The trade date decides the year. For FY 2026-27 the sale must be executed by 31 March 2027, and a fund redemption must be submitted before that day's cut-off time. Do not leave it to the last session.
How do I report it?
Any short-term gain, any capital loss, or long-term gains above ₹1.25 lakh take you out of ITR-1 and into ITR-2; see which ITR form to file. Equity bought before 31 January 2018 keeps its grandfathered cost. If you invest monthly, the SIP calculator gives a sense of how fast unrealised gains can build, and the tax-regime calculator covers your slab income.
FAQ
What is tax harvesting?
Is tax harvesting a good idea?
What is the last date for tax harvesting in FY 2026-27?
Does the ₹1.25 lakh limit apply to each fund or share separately?
Can I buy back the same share or fund immediately?
Sources: Income-tax Act, 2025, sections 111, 121, 196 and 198 (text of s.111); Income Tax Department: set-off and carry-forward of losses; TaxTMI: Section 198 vs s.112A; ClearTax: capital gains on shares, FY 2026-27; ClearTax: STT rates after Budget 2026. All checked 19 Sep 2026. Education only, not tax advice for your situation.
Co-founder, Tax & Compliance · About