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Tax-loss harvesting in India means selling an investment below its tax cost so the realized capital loss can offset eligible capital gains. A fall shown in your portfolio is not a tax loss until you transfer the shares or fund units. For listed shares and equity-oriented mutual funds, first classify each sale as short-term or long-term, then match the loss only with the type of gain the law permits. File the loss return by the section 139(1) due date and preserve broker and fund evidence, or the carry-forward benefit can be lost.
This guide applies the Income Tax Department rules and the section 112A changes effective for transfers on or after 23 July 2024. Rates, thresholds, forms and due dates can change by assessment year, so confirm the current return instructions before filing. Large, nonresident, inherited, corporate or disputed transactions warrant advice from a qualified Indian tax professional.
What tax-loss harvesting actually does
When you sell a share or equity-oriented mutual-fund unit for less than its tax cost, the difference is a realized capital loss. That loss enters the capital-gains computation for the year of transfer. You can use it against eligible capital gains, reducing the gains on which tax is calculated. The transaction can also change your portfolio exposure, crystallize dealing costs and affect the timing of future gains, so tax is only one part of the decision.
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Holding an investment whose market price is below your purchase price does not by itself create a deductible loss. The transfer must be completed and supported by a contract note, redemption statement or equivalent record.
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The rules that determine whether a harvest works
| Question | Rule for the relevant equity assets |
|---|---|
| When is a loss created? | On a completed sale or redemption at a value below the tax cost; an unrealized market decline is not enough. |
| How is holding period classified? | Listed equity shares and equity-oriented mutual-fund units generally become long-term after 12 months. A shorter holding is short-term. |
| What can STCL offset? | Short-term capital loss (STCL) can offset short-term capital gains (STCG) and long-term capital gains (LTCG), subject to the capital-gains computation rules. |
| What can LTCL offset? | Long-term capital loss (LTCL) can offset only LTCG. |
| What is the section 112A threshold? | For eligible section 112A assets transferred on or after 23 July 2024, aggregate LTCG above ₹1,25,000 is taxed at 12.5% when the statutory conditions are met. |
| How long can an unused loss remain available? | Generally, for eight succeeding tax years, provided the loss return is filed on time. |
| Which income can receive the set-off? | Capital gains. A capital loss is not a general deduction against salary, interest or business income under these set-off rules. |
Section 70 describes the cross-set-off for a short-term capital loss: a loss from a short-term capital asset may be set off against income computed in the same manner from another capital asset. Section 111 preserves the distinction for carry-forward use: short-term losses can be used against gains from any capital asset, while long-term losses remain restricted to long-term gains.
Step 1: Build a complete holding inventory
Start with data, not a tax target. Export the broker’s tax profit-and-loss report, every relevant contract note and each mutual-fund capital-gains statement. The Income Tax Department’s ITR guidance expects investors with share transactions to maintain a profit/loss summary for computation.
Record these fields for every proposed sale
- Security or scheme name, ISIN or folio and whether it is a listed equity share or an equity-oriented mutual-fund unit.
- Acquisition date, quantity and acquisition cost, including the cost elements accepted under the applicable capital-gains computation.
- Proposed sale or redemption date, quantity, gross sale value and transaction expenses.
- Whether the transfer and, where required, acquisition satisfy the securities transaction tax (STT) conditions.
- Existing unrealized gain or loss, and any lots with different acquisition dates.
- Capital losses already carried forward, separated into STCL and LTCL by financial year.
Use lot-level dates. Selling units bought at different times can produce both short-term and long-term results in one order. Do not rely only on an app’s “returns” percentage: tax cost, corporate actions, expenses and the legal holding-period test may differ.
Step 2: Classify each lot as STCG, LTCG, STCL or LTCL
For listed equity shares and equity-oriented mutual-fund units, the official ITR FAQ generally uses 12 months as the long-term threshold. Determine the period from acquisition to transfer for each lot before deciding which loss to realize.
- Match each sale quantity to its acquisition lots under your broker or fund records.
- Count the holding period for each lot and label the result short-term or long-term.
- Compute the gain or loss after the applicable cost and transfer expenses.
- Keep STCL and LTCL in separate running totals; they are not interchangeable.
Example: if a lot acquired on 10 September 2025 is sold on 5 August 2026, it has not reached 12 months and is generally short-term. A lot acquired on 10 July 2025 and sold on 15 July 2026 generally crosses the 12-month threshold. Apply the dates to the actual transaction and the current return instructions.
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Step 3: Match the loss to the right gains
| Loss realized | Permitted current-year set-off | Planning implication |
|---|---|---|
| STCL | STCG and LTCG | Most flexible; it can protect either type of capital gain. |
| LTCL | LTCG only | Needs long-term gains in the current year or in a later eligible year. |
Do not describe either loss as an offset against salary, bank interest or ordinary business income. The cited capital-loss provisions limit the set-off to capital gains. If your only gain is STCG, realizing an LTCL may not produce a current-year benefit, whereas an STCL could be usable.
Use current gains before planning a carry-forward
First apply current-year losses against eligible current-year capital gains in the order allowed by the computation. If a balance remains, record it by type and year for later use. A harvest is therefore more useful when you can identify the gain it will meet, rather than selling solely because a position is down.
Step 4: Check section 112A, section 111A and STT eligibility
The tax result for equity investments depends on whether the asset and transaction qualify for the special provisions. Section 112A covers specified long-term gains on listed equity shares, equity-oriented fund units and qualifying business-trust units. For transfers on or after 23 July 2024, the Income Tax Department records a 12.5% rate on the portion of eligible section 112A LTCG above the aggregate ₹1,25,000 threshold, when the statutory conditions are met.
Section 112A is not automatic for every share or fund sale. STT must be paid on transfer and, for equity shares, is generally required on acquisition as well; exceptions exist. Verify the transaction’s eligibility from contract notes and the applicable law instead of assuming that an equity label is sufficient.
Section 111A is the special short-term provision for STT-paid listed equity shares and equity-oriented fund units. Confirm which provision applies to each gain or loss in the current assessment year and use the relevant ITR schedule.
Step 5: Choose what to sell and whether to replace it
A defensible harvest normally starts with an investment whose thesis, risk or desired allocation has changed. Selling only to manufacture a loss can leave you out of the market, increase concentration elsewhere or create costs larger than the tax benefit.
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- Loss type: STCL is usable against both gain types; LTCL requires LTCG.
- Available gains: Identify the amount and type of gains you expect to report this year.
- Section 112A position: Consider whether eligible LTCG is above or below the ₹1,25,000 aggregate threshold.
- STT evidence: Check whether the asset and transaction satisfy the relevant conditions.
- Costs: Include brokerage, exchange charges, taxes, bid-ask spread, fund exit loads and any tracking difference.
- Portfolio risk: Decide whether to hold cash, rebalance into a genuinely different exposure or maintain the allocation through another suitable instrument.
- Future usability: Estimate whether the loss can realistically be used during its permitted carry-forward period.
Indian tax law does not have a clearly established general wash-sale rule in the material governing this guide. Do not assume that an immediate repurchase is either unrestricted or prohibited in every fact pattern. A planned sale-and-repurchase involving related parties, unusual pricing or a tax-driven sequence should be reviewed by an adviser.
Step 6: Execute and document the transaction
- Confirm the chosen lots, holding periods and expected loss before placing the order.
- Check the live quote, spread, liquidity, exit load and all dealing charges.
- Sell the shares through the broker or redeem the fund units. A proposed order or an unrealized price is not a realized loss.
- Download the contract note, trade confirmation, broker tax P&L and, for funds, the redemption statement.
- Reconcile the final sale value, expenses, STT and quantity with the records used for your computation.
- Update a capital-gains ledger showing the realized STCL or LTCL, the gains it offsets and any balance to carry forward.
Keep acquisition proofs too: demat statements, fund account statements, dividend or corporate-action records and evidence of original cost. If a broker report conflicts with a contract note, resolve the difference before filing.
Step 7: Apply the loss and carry forward any balance
Use the current-year capital loss against eligible current-year capital gains under its type. An STCL can absorb STCG or LTCG; an LTCL can absorb only LTCG. Any unused amount can generally be carried forward for eight succeeding tax years. The period is counted from the assessment year following the year in which the loss was incurred, and the original character must be preserved.
Maintain a year-by-year loss ledger
| Year of loss | Loss type | Original amount | Used in each later year | Balance and final expiry year |
|---|---|---|---|---|
| For example, FY 2026-27 | STCL or LTCL | Computed from filed return | Allocate only to permitted gains | Track through the eighth succeeding tax year |
This ledger prevents an old LTCL from being accidentally applied to STCG and shows which balance expires first. Reconcile it with the schedules and acknowledgements for every return.
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Step 8: File on time or risk losing the carry-forward
The Income Tax Department’s ITR-2 FAQ states: “Such loss can be carried forward only if the return of income / loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return, as prescribed u/s 139(1).” In practical terms, file the return reporting the capital loss by the section 139(1) due date for that assessment year. A late loss return can prevent the unused amount from being carried forward.
Use the applicable capital-gains and carry-forward schedules, enter each transfer accurately and complete the required validation. Forms and due dates are assessment-year specific; check the current Income Tax Department instructions rather than copying a prior year’s workflow.
Evidence checklist for the return
- Broker contract notes and consolidated tax profit-and-loss report.
- Mutual-fund capital-gains and redemption statements.
- Acquisition dates, costs and quantity records for every lot.
- Sale values, expenses and STT evidence.
- Filed ITR acknowledgement and computation showing the loss set-off and carry-forward.
- Your running ledger of STCL and LTCL by year.
Worked planning examples
Example 1: STCL offsets both kinds of gain
Assume you realize ₹90,000 of STCL. In the same year you have ₹50,000 of STCG and ₹40,000 of eligible LTCG. The STCL can be allocated across those gains, subject to the return computation, leaving no unused loss. The example demonstrates flexibility; it does not change the separate rate and eligibility rules for the gains.
Example 2: LTCL cannot offset STCG
Assume you realize ₹1,00,000 of LTCL but have ₹70,000 of STCG and no LTCG. The LTCL cannot be used against that STCG. The unabsorbed amount remains an LTCL for possible use against LTCG in a later year, provided the filing and carry-forward conditions are met.
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Suppose your eligible section 112A LTCG for the relevant year is ₹1,80,000, the assets satisfy the STT conditions and the transfers occur on or after 23 July 2024. The aggregate amount above ₹1,25,000 is ₹55,000, and the department’s stated 12.5% rate applies to that above-threshold portion under the applicable law. Other gains, losses, deductions and eligibility facts can change the final computation.
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Transition to the Income-tax Act, 2025
The department’s transition FAQ says losses incurred before 1 April 2026 continue under the Income-tax Act, 2025 through repeal-and-saving provisions. Their original character and carry-forward limits are retained. Keep pre-April-2026 STCL and LTCL in the same historical ledger, label the year clearly and do not reclassify an old loss merely because the governing statute has changed.
Common failure modes and fixes
“My portfolio is down, so I already have a tax loss.”
Fix: Complete and document a sale or redemption. An unrealized decline has no capital-loss set-off.
“Any capital loss can reduce my salary income.”
Fix: Apply the loss only within the capital-gains rules. Salary, interest and business income are not the capital-gain set-off target described here.
“Long-term loss can offset my short-term gain.”
Fix: LTCL is restricted to LTCG. Consider whether an STCL candidate better matches the gains you actually have.
“Every equity sale gets the 12.5% section 112A treatment.”
Fix: Verify the asset definition, transfer date, STT on transfer and the acquisition condition for equity shares. Section 112A eligibility is fact-specific.
“I can file the loss return whenever convenient.”
Fix: File by the section 139(1) due date to preserve the carry-forward, and retain the acknowledgement.
“An app’s tax P&L is enough evidence.”
Fix: Reconcile it with contract notes, fund statements, acquisition records and STT evidence. Correct discrepancies before filing.
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- Have I completed a sale or redemption, rather than relying on an unrealized price?
- Do I know the acquisition and transfer date for every lot?
- Is the result STCL, LTCL, STCG or LTCG?
- Which current-year gains can legally receive the loss?
- Does section 112A or section 111A apply, and are the STT conditions documented?
- Do transaction costs, exit loads and portfolio consequences outweigh the expected tax benefit?
- Is any unused balance recorded separately by type and year?
- Will the loss return be filed by the section 139(1) due date?
- Have I saved the contract notes, statements, computation and acknowledgement?
Tax-loss harvesting is most defensible when the investment decision makes sense without the tax effect, the loss type matches a real capital gain and the paperwork supports every number.
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