Tax Loss Harvesting India 2026 — How to Offset Capital Gains and Save Tax Legally

Tax loss harvesting is a legal strategy to reduce your capital gains tax by deliberately selling loss-making investments to offset gains. It is widely used in India, especially at the end of the financial year. Here is the complete guide for FY 2025-26.

What Is Tax Loss Harvesting?

Tax loss harvesting involves:

1. Identifying investments that are currently at a loss
2. Selling them to realize the loss
3. Using that loss to offset capital gains from other investments
4. Optionally buying back the same or similar investments

The result: lower net capital gains, lower tax.

Set-Off Rules — What Can Offset What?

Key rule: LTCG losses can only offset LTCG, not STCG. STCG losses can offset both STCG and LTCG.

Carry Forward Rules

If losses cannot be fully set off in the current year:

Critical: To carry forward losses, you must file your ITR before the due date (July 31 for non-audit cases). Late filing forfeits the right to carry forward.

Practical Tax Loss Harvesting Strategies

Strategy 1: Offset STCG with STCG Losses

If you have STCG from selling profitable stocks, sell loss-making stocks to offset:

• STCG tax rate: 20%
• Every ₹1L of STCG offset saves ₹20,000 in tax

Example:

• STCG from Stock A: ₹2,00,000
• Loss from Stock B: ₹80,000
• Net STCG: ₹1,20,000
• Tax saved: 20% × ₹80,000 = ₹16,000

Strategy 2: Use the ₹1.25L LTCG Exemption

LTCG from listed equity above ₹1.25L is taxed at 12.5%. If your LTCG is close to ₹1.25L, consider:

• Booking profits up to ₹1.25L each year (tax-free)
• Selling and rebuying to reset the cost basis

Example:

• Unrealized LTCG: ₹3L
• Sell and rebook: Book ₹1.25L LTCG (tax-free), reset cost basis
• Remaining unrealized gain: ₹1.75L (deferred to next year)

Strategy 3: Harvest Losses Before March 31

Review your portfolio in February-March:

• Identify loss-making positions
• Sell before March 31 to realize losses in the current financial year
• Use losses to offset gains realized earlier in the year

Strategy 4: Debt Fund Loss Harvesting

Debt mutual funds held for less than 3 years: STCG taxed at slab rate.

• If you have STCG from debt funds, offset with STCG losses from other assets
• If you have LTCG from property, offset with LTCG losses from debt funds (held > 3 years)

No Wash Sale Rule in India

India does not have a "wash sale" rule (unlike the US). You can:

• Sell a loss-making stock
• Buy it back immediately (same day or next day)
• Still claim the loss for tax purposes

This makes tax loss harvesting more flexible in India than in the US.

Tax Loss Harvesting for Mutual Funds

Equity mutual funds:

• LTCG (held > 12 months): 12.5% above ₹1.25L
• STCG (held ≤ 12 months): 20%
• Harvest losses by switching between similar funds (e.g., from one large-cap fund to another)

Debt mutual funds:

• STCG (held ≤ 3 years): Slab rate
• LTCG (held > 3 years): 12.5% (without indexation from FY 2024-25)
• Harvest losses by switching between similar debt funds

How to Report in ITR

Report all capital gains and losses in Schedule CG of ITR-2 or ITR-3:

• Enter each transaction (sale price, cost of acquisition, date of purchase, date of sale)
• The ITR utility automatically calculates set-off and carry forward
• Losses carried forward appear in Schedule CFL

Common Mistakes

1. Not filing ITR on time — Losses cannot be carried forward if ITR is filed late
2. Confusing STCG and LTCG losses — LTCG losses cannot offset STCG
3. Not tracking cost basis — Incorrect cost basis leads to wrong gain/loss calculation
4. Ignoring small losses — Even small losses add up and can offset significant gains

Frequently Asked Questions

Can I offset capital gains from property with stock market losses?

Yes. STCG losses from stocks can offset STCG from property. LTCG losses from stocks can offset LTCG from property.

Is there a minimum loss amount for tax loss harvesting to be worthwhile?

No minimum. Even small losses are worth harvesting if you have gains to offset. The tax saving is proportional to the loss amount.

Can I harvest losses in my spouse's account to offset my gains?

No. Capital gains and losses are individual — you cannot use your spouse's losses to offset your gains.

---

Active investor with capital gains and losses? I handle ITR-2 with complete capital gains schedules, loss set-off, and carry forward reporting. WhatsApp for a quote.