Tax loss harvesting is the practice of selling investments that are currently at a loss to offset taxable gains elsewhere in your portfolio — reducing your overall tax liability for the year.
In the United States, this strategy is limited by the wash-sale rule: if you sell a security at a loss and buy the same security within 30 days, the loss is disallowed for tax purposes.
India has no wash-sale rule. You can sell a losing position today and buy it back tomorrow. The loss is recognised for tax purposes. The position is economically unchanged. Your tax bill is lower.
Section 70 of the Income Tax Act allows capital losses to be set off against capital gains in the same financial year. Specifically, Section 70(2) says short-term capital losses can be set off against both short-term and long-term capital gains. Section 70(3) says long-term capital losses can only be set off against long-term capital gains.
Say you've had a good year trading. Your realised STCG gains are ₹8 lakh across 40 positions. Your portfolio is also holding three positions currently in loss — BANKBARODA down ₹60,000, HDFCBANK down ₹45,000, and DIVISLAB down ₹35,000. Total unrealised losses: ₹1.4 lakh.
If you do nothing, your STCG tax bill is ₹1,60,000 (20% of ₹8 lakh).
If you sell all three losing positions before March 31st, your net taxable gain drops to ₹6.6 lakh. Tax bill: ₹1,32,000. Saving: ₹28,000.
You can then immediately buy back all three positions. Your portfolio composition is identical. Your tax bill is smaller.
Long-term capital gains up to ₹1.25 lakh per financial year are exempt from tax under Section 112A. This exemption resets every year and cannot be carried forward.
If your total LTCG for the year is below ₹1.25L, you have unused exemption headroom. You can sell long-term positions with unrealised gains before March 31st, book those gains completely tax-free, and immediately buy back the same position at the higher price. Your cost basis resets higher. Future gains are smaller.
Everything above only works if you act before March 31st. Losses sold on April 1st fall into the new financial year and can only offset next year's gains. This sounds obvious but it catches traders every year — positions they were planning to exit anyway, sold just after the deadline because nobody flagged the date.
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Scan my tradebook →CA verification required on all outputs. This is not tax advice. Consult a qualified Chartered Accountant before taking any action.