What is tax-loss harvesting and is it legal in India?
Tax-loss harvesting means deliberately selling losing investments to book losses that offset your capital gains — reducing your tax. It's fully legal in India. Short-term losses offset both STCG and LTCG; long-term losses offset only LTCG. Unused losses carry forward 8 years if you file on time. Here's the full strategy with a worked example.
All figures and facts in this article are sourced directly from primary government and regulatory publications — including the Reserve Bank of India, SEBI, EPFO, the Income Tax Department, PFRDA, and IRDAI — and verified before publication. No claim is published from a single source without corroboration.
For informational purposes only. Tax-loss harvesting involves real transactions with tax and market implications. Consult a CA before acting.
Tax-loss harvesting is the practice of deliberately selling investments that are at a loss to "book" that loss, which you then use to offset capital gains elsewhere — reducing your total capital gains tax. It is entirely legal in India, explicitly permitted by the set-off rules in the Income Tax Act. Done thoughtfully, it can meaningfully reduce your tax bill in a year where you have realised gains.
The principle: losses offset gains
Under the Income Tax Act, capital losses can be set off against capital gains, reducing the net taxable gain. Tax-loss harvesting means intentionally realising a loss (selling a losing investment) so that loss is available to offset gains you have made elsewhere.
Simple example:
- You have ₹2,00,000 of realised long-term capital gains (LTCG) on equity this year
- You also hold a stock currently at a ₹1,00,000 unrealised loss
- If you sell the loss-making stock, you book a ₹1,00,000 loss
- That loss offsets ₹1,00,000 of your gains
- Net taxable LTCG: ₹2,00,000 − ₹1,00,000 = ₹1,00,000 (which is within the ₹1.25 lakh exemption, so tax may be zero)
Without harvesting, you would pay 12.5% on the gains above the ₹1.25 lakh exemption. By booking the loss, you reduce or eliminate that tax.
The set-off rules you must follow
The Income Tax Act has specific rules on which losses can offset which gains:
| Loss type | Can offset |
| Short-term capital loss (STCL) | Both STCG and LTCG |
| Long-term capital loss (LTCL) | Only LTCG (not STCG) |
Key points:
- Short-term capital losses are more flexible — they can offset both short-term and long-term gains
- Long-term capital losses can only offset long-term gains
- Capital losses cannot offset salary or other income
- Unused losses can be carried forward for 8 years — but only if you file your ITR by the due date (July 31)
Source: Capital loss set-off, ClearTax
How tax-loss harvesting works in practice
Step 1: Identify realised gains for the year.
Check your total capital gains booked so far in the financial year (from stock and mutual fund sales).
Step 2: Identify unrealised losses in your portfolio.
Look for holdings currently below your purchase price — investments at a loss.
Step 3: Sell loss-making investments to book losses.
Sell enough loss-making holdings to offset your gains (or to carry forward for future years).
Step 4: Optionally rebuy.
If you still believe in the investment, you can rebuy it. India has no formal "wash sale" rule preventing immediate repurchase (unlike the US), though you should be mindful of the holding period resetting on the new purchase.
Step 5: Report in your ITR.
Declare both the gains and the harvested losses in Schedule CG of your ITR. The set-off is applied during computation.
Worked example
Neha's capital gains position in FY 2025-26:
- Realised STCG on equity: ₹1,50,000 (taxed at 20%)
- Realised LTCG on equity: ₹2,00,000
She holds two underperforming stocks:
- Stock A: ₹80,000 unrealised short-term loss
- Stock B: ₹60,000 unrealised long-term loss
Harvesting:
- She sells Stock A, booking ₹80,000 STCL. This offsets her STCG: ₹1,50,000 − ₹80,000 = ₹70,000 net STCG (taxed at 20%)
- She sells Stock B, booking ₹60,000 LTCL. This offsets her LTCG: ₹2,00,000 − ₹60,000 = ₹1,40,000 net LTCG
- After the ₹1.25 lakh LTCG exemption: ₹1,40,000 − ₹1,25,000 = ₹15,000 taxable LTCG
Tax saved:
- On STCG: ₹80,000 × 20% = ₹16,000 saved
- On LTCG: ₹60,000 effectively shielded, plus the exemption covers most of the rest
By harvesting losses she would have held anyway (the stocks were underperforming), Neha legitimately reduced her capital gains tax.
◇ Quick check: Before March 31 each year, review your realised gains and your portfolio's unrealised losses. If you have booked gains and hold investments at a loss you no longer want, harvesting those losses can offset the gains and reduce your tax — while cleaning up underperformers.
Tax-loss harvesting vs LTCG harvesting
These are two different (and complementary) strategies:
- Tax-loss harvesting: Sell losers to book losses that offset gains — reduces tax on gains you have already made.
- LTCG harvesting: Sell winners up to the ₹1.25 lakh exemption to book tax-free gains and reset your cost basis — uses the annual exemption before it lapses.
Both are legal and can be used together as part of year-end tax planning. (See the separate LTCG harvesting article for that strategy.)
⚠ Common mistakes
Mistake 1: Selling a good investment just to book a loss. Harvest losses on investments you genuinely no longer want or that have weak prospects. Do not sell a fundamentally sound holding purely for the tax loss — you may miss its recovery. If you still believe in it, you can rebuy, but the holding period resets.
Mistake 2: Forgetting the LTCL-only-offsets-LTCG rule. A long-term loss cannot offset a short-term gain. Match loss types to gain types correctly.
Mistake 3: Not filing on time to carry forward. Unused losses carry forward 8 years only if you file your ITR by July 31. File late, and you forfeit the carry-forward.
Bottom line
- Tax-loss harvesting means deliberately booking losses to offset capital gains, reducing your tax — fully legal in India
- Short-term losses offset both STCG and LTCG; long-term losses offset only LTCG
- Losses not used this year carry forward 8 years — but only if you file your ITR by the due date
- India has no wash-sale rule, so you can rebuy (holding period resets)
- Harvest losses on investments you no longer want; do not sell sound holdings purely for the tax benefit
Frequently asked questions
Q: Is tax-loss harvesting legal in India?
A: Yes. Setting off capital losses against capital gains is explicitly permitted by the Income Tax Act. Intentionally realising losses to use this set-off is legitimate tax planning, not evasion. You must report all transactions accurately in your ITR.
Q: Can I use capital losses to reduce my salary tax?
A: No. Capital losses can only offset capital gains, not salary or other income heads. If you have losses but no capital gains this year, carry the losses forward (up to 8 years) to offset future gains.
Q: Can I sell a stock at a loss and buy it back the same day?
A: Yes — India has no wash-sale rule. You can book the loss and repurchase. Note that the new purchase starts a fresh holding period, so a stock you rebuy will be short-term again for the next 12 months.
Q: I have ₹3 lakh in losses but only ₹1 lakh in gains this year. What happens to the extra ₹2 lakh?
A: You offset ₹1 lakh against this year's gains, and carry forward the remaining ₹2 lakh for up to 8 years to offset future capital gains. You must file your ITR by July 31 to preserve the carry-forward.
Sources: Capital gains set-off, ClearTax · Set-off and carry-forward of losses, Income Tax Department
Last verified: June 2026. Capital gains and set-off rules are per the Income Tax Act for FY 2025-26. Consult a CA before acting.
Content on Ek Crore is for educational purposes only. Nothing here is financial advice. Always consult a SEBI-registered advisor, CA, or qualified professional before making investment or tax decisions.