LTCG harvesting: how to use the ₹1.25 lakh annual exemption before March 31 and reset your cost basis

For informational purposes only. LTCG harvesting involves real transactions with tax and market implications. This is an informational explanation — not tax or investment advice. Consult a SEBI-registered investment advisor and CA before acting.

The ₹1.25 lakh annual LTCG exemption on equity investments is an allowance the income tax system gives you every financial year. If you do not use it, you do not carry it forward — it simply lapses. LTCG harvesting is the practice of deliberately booking gains up to ₹1.25 lakh each year before March 31 to reset your cost basis and avoid paying tax on those gains later.

Done correctly, it is entirely legal, explicitly encouraged by the tax structure, and can save meaningful amounts in tax over a long investment horizon.

The ₹1.25 lakh LTCG exemption: what it is

Under Section 112A of the Income Tax Act, long-term capital gains from equity-oriented mutual funds and listed equity shares are taxed at 12.5% — but only above ₹1,25,000 per financial year. The first ₹1.25 lakh of LTCG each year is fully exempt from tax.

This exemption:

• Applies to each financial year (April 1 to March 31) independently
• Does not carry forward — unused exemption in FY 2025-26 cannot offset gains in FY 2026-27
• Applies to the total LTCG across all equity instruments (mutual funds + stocks) in the year
• Is available to each individual separately — a married couple each has their own ₹1.25L exemption

For gains to qualify as LTCG (and be eligible for the 12.5% rate and the exemption), equity fund units or equity shares must be held for more than 12 months.

Source: LTCG tax, Income Tax Department

What LTCG harvesting means

LTCG harvesting means:

The gain is realised on paper — you lock in the profit at the current price as your new cost basis — but your money stays invested in the same fund.

A worked example

Setup: Priya invested ₹5,00,000 in a Nifty 50 index fund in March 2023 (Direct Plan, Growth). It is now March 2026. Her investment has grown to ₹7,80,000. Unrealised LTCG: ₹2,80,000. All units have been held for more than 12 months.

Without harvesting:

If Priya eventually redeems all ₹7.8L in a future year (say, 2030), and her LTCG in that year is ₹2,80,000 from this fund:

Tax: ₹2,80,000 − ₹1,25,000 exemption = ₹1,55,000 taxable LTCG.

Tax = ₹1,55,000 × 12.5% = ₹19,375

With harvesting in March 2026:

Priya sells ₹6,25,000 worth of units (enough to book exactly ₹1,25,000 of LTCG: sale value ₹6,25,000, cost ₹5,00,000, gain ₹1,25,000).

Tax on ₹1,25,000 gain: ₹0 (fully within exemption).

She immediately buys back ₹6,25,000 of the same fund.

New cost basis: ₹6,25,000 for those units.

Remaining unrealised gain: ₹2,80,000 − ₹1,25,000 = ₹1,55,000.

She repeats this exercise in March 2027 (harvests another ₹1.25L if gains allow).

Cumulative tax saved: Each year she harvests ₹1.25L, she avoids ₹15,625 in future tax (₹1.25L × 12.5%). Over 5 years of consistent harvesting: ₹78,125 in tax saved. That capital stays invested and compounds.

The mechanics: how to actually do it

Step 1: Calculate your LTCG headroom

Check your total equity LTCG so far in the financial year from all sources (mutual fund redemptions, stock sales). Your headroom is ₹1,25,000 minus LTCG already booked this year.

Step 2: Identify which units to sell

In your mutual fund folio, identify units held for more than 12 months with unrealised gains. Mutual fund platforms show this in the "Capital gains statement" section (or you can calculate from the purchase date and current NAV).

Step 3: Sell to book gains up to headroom

Sell enough units to book LTCG equal to (or slightly below) your remaining exemption for the year. Do not go over — gains above ₹1.25L are taxable.

Step 4: Buy back immediately

Reinvest the proceeds in the same fund (or a similar fund if you prefer). There is no mandatory "wash sale" rule in India — unlike the US, you can repurchase the same fund the next day. There is a 1-business-day settlement period for mutual fund redemptions, so timing matters — sell a few days before March 31 to ensure the buyback clears within the financial year.

Step 5: Track the new cost basis

Your new units are purchased at the current higher NAV. This becomes your new cost of acquisition for future capital gains calculations.

Important caveats

Transaction costs: Mutual fund redemptions and reinvestments carry no brokerage for direct plans. There may be exit loads if units are held for less than the exit load period (usually 1 year for equity funds). Harvest only units past the exit load period.

STT: Securities Transaction Tax is charged on equity fund redemptions at 0.001% — negligible.

Market risk during the gap: If you redeem and the market falls before you buy back, you re-enter at a lower price (which is actually beneficial — lower cost basis). If the market rises, you miss a small amount of gains. This is a minor risk over a 1–2 day window.

STCG units: Only units held 12+ months qualify for LTCG treatment. Units held under 12 months attract 20% STCG — do not sell these for harvesting purposes.

The grandfathering rule: For units purchased before February 1, 2018, the cost of acquisition is the higher of actual purchase price or the NAV on January 31, 2018. This may affect the gain calculation for very old units.

⚠ Common mistake: Harvesting in March without checking LTCG already booked earlier in the year (from other redemptions or stock sales). If you booked ₹80,000 of LTCG in December from a stock sale, you only have ₹45,000 of headroom left in March — not ₹1.25L. Exceed the limit and the excess is taxable.

Who benefits most from LTCG harvesting

• Long-term investors in equity funds with significant unrealised gains
• Investors who do not regularly redeem their equity portfolio (if you are already redeeming for goals, you are likely already booking LTCG — check whether you are using the exemption efficiently)
• Investors in the 20–30% tax bracket (the higher your bracket, the more valuable the 12.5% LTCG rate and exemption)
• Those with multiple folios where gains can be precisely controlled

Bottom line

• The ₹1.25L annual LTCG exemption on equity is use-it-or-lose-it — it does not roll forward
• LTCG harvesting: sell equity fund units to book exactly ₹1.25L of gains (tax-free), then immediately buy back to reset cost basis
• ₹1.25L harvested per year saves ₹15,625 in future tax; over 5 years, that is ₹78,125 of tax saved while remaining fully invested
• Only units held 12+ months qualify; watch exit loads; do this before March 31 each year
• Track all LTCG booked through the year before harvesting — the exemption is shared across all equity gains

Frequently asked questions

Q: Can I sell and buy back the exact same fund, or do I need to switch to a different fund?

A: You can sell and buy back the exact same fund. India has no wash-sale rule preventing immediate repurchase of the same security. The NAV will be slightly different on repurchase due to 1-day settlement, but the fund is the same.

Q: My LTCG from harvesting is ₹1.25L. Do I still need to show it in my ITR?

A: Yes. Report the full LTCG under Schedule 112A of the ITR. The exemption of ₹1.25L is then deducted, resulting in zero tax. Do not skip the reporting just because no tax is owed — omitting it creates mismatches with AIS data.

Q: My spouse and I both have mutual fund investments. Can we each harvest ₹1.25L?

A: Yes. Each individual has their own ₹1.25L exemption. If you file separate ITRs, you each harvest in your own name from your respective folios.

Sources: Section 112A, Income Tax Department · LTCG tax on equity, ClearTax

Last verified: June 2026. LTCG exemption is ₹1.25L per year per Budget 2024 (effective July 23, 2024). Verify at incometax.gov.in.