Tax-loss harvesting is the practice of deliberately selling investments currently trading below your purchase price to "realise" a capital loss, then using that realised loss to offset taxable capital gains from other investments — reducing your overall tax bill for the year. Tax-loss harvesting is not tax evasion; the set-off provisions under Sections 70 to 74 of the Income Tax Act explicitly authorise this adjustment, as confirmed by detailed guides from tax advisory firms specialising in investor strategy, and it's a standard year-end technique used by chartered accountants and wealth managers across the industry. Anyone building a diversified portfolio that includes gold, Sovereign Gold Bonds, and equities together will find that tax-loss harvesting specifically applies to the equity and equity-fund portion of that mix, since gold and SGBs follow their own separate tax treatment.

The critical word is realised. The Income Tax Department does not recognise notional or "paper" losses — the ones sitting unrealised in your demat account but never actually booked through a sale. You have to actually sell the investment before the financial year closes to make the loss count, a deadline Angel One's tax planning coverage describes as genuinely non-negotiable.

A Simple Example

Suppose you've booked ₹1,00,000 in short-term capital gains this year, taxed at 20% — a ₹20,000 tax bill. If you also hold stocks with ₹80,000 in unrealised short-term losses, selling those brings your net taxable STCG down to ₹20,000, reducing your tax to ₹4,000. That's a straightforward ₹16,000 in tax saved through tax-loss harvesting, without changing your overall investment thesis — you're simply choosing when to formally book a loss you already have, a mechanic explained clearly in Zerodha's own tax reporting documentation.

Understanding tax-loss harvesting requires knowing exactly what rates you're working with, since these determine how much tax-loss harvesting is actually worth. 1Finance's 2026 harvesting guide frames this correctly: harvesting decisions should be a math exercise, not a ritual — estimate the gross tax saving, subtract unavoidable transaction costs, and only proceed if the net benefit is clearly positive.

STCG vs LTCG

Type	Holding Period	Tax Rate
Short-Term Capital Gains (STCG)	Under 12 months	20%
Long-Term Capital Gains (LTCG)	Over 12 months	12.5% (above ₹1.25 lakh exemption)

These rates apply to listed equity shares and equity-oriented mutual funds, and reflect the revised structure introduced in the Union Budget 2024, effective for transfers on or after July 23, 2024. No indexation benefit applies under the current regime. For equity purchased before January 31, 2018, a grandfathering rule applies: the cost of acquisition is considered the higher of the actual purchase price or the peak trading price on that date, capped at the final sale value — a nuance specialist wealth advisory research flags as commonly overlooked for legacy portfolios, including those built up during periods of consistent SIP investing across multiple years and tracked against broader macro rate cycles.

The ₹1.25 Lakh LTCG Exemption

Every financial year, the first ₹1.25 lakh of long-term capital gains on equity is entirely tax-free under Section 112A. This creates a second, related strategy — "gain harvesting" — where investors deliberately book gains up to this threshold (even on stocks they intend to keep) and immediately repurchase, effectively resetting their cost basis higher at zero tax cost, permanently reducing future taxable gains on that holding, a technique detailed further by WealthOrbit's combined gain-and-loss harvesting guide, and one that pairs naturally with broader portfolio hygiene like reviewing your demat holdings and comparing execution costs via NSE vs BSE brokers each year.

This is where many investors make costly mistakes with tax-loss harvesting. Not all losses can be netted against all gains — India's tax code follows a precise, non-negotiable pecking order, summarised clearly in detailed set-off hierarchy documentation aimed at active investors.

STCL — The Universal Eraser

Short-term capital losses (STCL) can be set off against both STCG and LTCG, making them the most flexible tool available. If you're deciding which losses to prioritise harvesting, STCL generally offers the broadest utility, and should typically be applied against your highest-taxed gains first — usually your STCG, since that's taxed at the higher 20% rate.

LTCL — More Restricted

Long-term capital losses (LTCL) can only be set off against LTCG — never against STCG or any other income head. This is a critical constraint that catches out investors who assume all capital losses work interchangeably, a confusion Bonanza Wealth's practitioner guide specifically calls out as one of the most common execution mistakes.

F&O and Intraday: A Different Set of Rules

Futures & Options (F&O) losses are classified as non-speculative business income and can be set off against any income head except salary — including capital gains from stocks and mutual funds — within the same financial year. Intraday (speculative) trading losses, by contrast, can only be set off against other speculative (intraday) profits — they cannot offset STCG, LTCG, or F&O gains at all, a distinction relevant to anyone also active in index-linked derivatives trading alongside a longer-term equity portfolio, and one that matters even more once you understand how macro drivers like currency movements can create the very volatility that generates these losses and gains in the first place.

Consider a salaried professional in Mumbai reviewing their portfolio in mid-March, ahead of the financial year close — exactly the moment tax-loss harvesting decisions typically need to be made:

Item	Amount	Tax Before Harvesting
LTCG from a Nifty index fund	₹2,50,000	Taxable: ₹1,25,000 (after exemption) → 12.5% = ₹15,625
STCG from a midcap stock	₹60,000	20% = ₹12,000
Total tax before harvesting		₹27,625

This investor then sells an underperforming IT sector fund (LTCG loss of ₹80,000) and a smallcap stock (STCG loss of ₹40,000) before March 31 — losses that were sitting unrealised in the portfolio regardless. The LTCG loss offsets part of the LTCG gain; the STCG loss fully offsets the STCG gain, eliminating that ₹12,000 tax entirely and meaningfully reducing the LTCG tax as well. Even in a broadly positive market year, a diligent investor can typically find pockets of losses like these — in sectoral funds that lagged, or SIP lots purchased at elevated NAVs.

Enter your capital gains and available losses to estimate how much tax-loss harvesting could save you this financial year.

This calculator applies STCL first (since it can offset both STCG and LTCG), then LTCL against remaining LTCG, per India's actual set-off hierarchy. It's an illustrative estimate — always verify with your CA before executing trades. Investors also tracking salary income alongside capital gains should factor both into their overall annual tax planning, since tax-loss harvesting only addresses the capital gains portion of total taxable income, not salary or other income heads.

No. Unlike the United States, where tax authorities disallow losses on securities sold and repurchased within 30 days (the "wash sale" rule), India has no formal, explicit equivalent restriction — a genuinely important structural difference that makes tax-loss harvesting in India considerably more flexible than the equivalent strategy for US-based investors, per wealth management research comparing both jurisdictions.

The T+1 Re-Entry Strategy

In practice, an Indian investor can sell a stock today to book a loss and repurchase it as soon as the next trading session, successfully harvesting the loss while maintaining the same market position — something that would be explicitly disallowed under US rules. This is a meaningful structural advantage for anyone doing tax-loss harvesting through their NSE or BSE brokerage account.

Where This Can Go Wrong: Colourable Devices

The absence of a wash sale rule doesn't mean unlimited freedom. If the Income Tax Department identifies a pattern of synchronised trades, reversal trades, or transactions clearly structured purely to manufacture a tax loss outside the normal course of investing, it can treat the arrangement as a "colourable device" and disallow the loss entirely. The safer, more defensible approach many tax professionals recommend: if selling Fund A at a loss, reinvest in a similar but distinct fund (for example, switching between two different AMCs' Nifty 50 index funds) rather than repurchasing the identical security — a nuance covered in depth by Zerodha's own investor education material.

If your realised losses exceed your gains in a given year, the excess isn't wasted — under Section 74 of the Income Tax Act, unabsorbed capital losses can be carried forward for up to 8 assessment years and set off against capital gains in those future years, as detailed in Section 74 compliance guidance for business investors. Carried-forward STCL retains its flexible character and can still offset either STCG or LTCG in later years; carried-forward LTCL remains restricted to offsetting only LTCG. When multiple years of carried-forward losses exist, the earliest year's losses are utilised first (FIFO) — a sequencing rule personal finance guides aimed at retail investors often gloss over but which materially affects long-term tax planning.

The July 31 Deadline That Changes Everything

Here's the single most consequential rule in this entire topic: to carry forward any unadjusted capital loss, your income tax return must be filed on or before the original due date under Section 139(1) — typically July 31. A belated return filed under Section 139(4) does not preserve this carry-forward right. Miss this deadline, and the ability to carry forward that loss is lost permanently, regardless of how legitimate the underlying loss was.

Also worth noting: brought-forward losses from prior years take statutory precedence over the current year's ₹1.25 lakh LTCG exemption — you must set off past losses against current gains first, before applying this year's exemption on top, a sequencing detail that surprises many first-time filers working with tax software rather than a Chartered Accountant.

The Income Tax Department has specific rules under Section 94 designed to prevent engineered losses around corporate actions — a set of provisions worth understanding alongside general corporate action knowledge like stock splits and other events that alter your cost basis.

Dividend Stripping

If you buy securities within 3 months prior to a dividend record date and sell them within 9 months after, any loss generated on that sale is disregarded to the extent of the tax-free dividend you received — preventing investors from manufacturing an artificial loss around a dividend payout.

Bonus Stripping

Similarly, buying units right before a bonus issue and then selling the original units at a loss immediately after (while retaining the "free" bonus units) is disallowed. The engineered loss is voided and instead added to the cost basis of the bonus units received — closing a loophole that once let investors harvest a loss without any genuine economic loss occurring. Both rules illustrate a broader principle worth internalising: tax-loss harvesting works because it reflects a genuine, real economic loss on an investment you actually held — the moment a transaction is structured purely to manufacture a tax outcome without genuine economic substance, it moves outside what the law permits.

Even investors who understand the mechanics of tax-loss harvesting in theory often stumble on the same practical execution mistakes each March:

• Letting harvesting drive investment decisions: Don't exit quality businesses purely to book a loss — harvest primarily from holdings you'd planned to trim or exit anyway, a discipline closely related to avoiding the behavioral mistakes that separately erode returns
• Forgetting brokerage and STT costs: In smaller portfolios, transaction costs can meaningfully eat into the net tax benefit — always calculate net savings after costs, not just the headline tax rate applied to the loss
• Confusing intraday losses with capital losses: Speculative (intraday) losses cannot offset STCG or LTCG at all, a distinction that trips up even experienced traders mixing trading styles, similar to confusion around other stock market mechanics that get misapplied under pressure
• Missing the March 31 settlement deadline: Trades must be completed and settled — not merely initiated — before the financial year closes for the loss to count
• Filing a belated return: As covered above, this alone forfeits the entire carry-forward benefit, regardless of how carefully the harvesting itself was executed

Understanding the mechanics here pairs well with broader tax-season reading — our ITR filing deadline guide and general beginner investing fundamentals both connect directly to executing a harvesting strategy correctly, and comparing buyback versus open-market sell decisions is increasingly relevant too, since buyback profits are now taxed strictly as capital gains starting April 1, 2026 — making buybacks a legitimate additional vehicle for harvesting strategies. Reviewing costs through tools like our Mutual Fund TER vs BER calculator and understanding your overall allocation via life cycle funds both support the broader year-round tax and portfolio planning that makes March 31 far less stressful when it arrives. For more, explore our full Stock Market section or browse the complete Play With Stock article library.