Tax loss harvesting is one of the few tax strategies that rewards something investors often put off: selling positions that are losing money. Done correctly, it lowers your capital gains tax for the year while keeping your portfolio invested.
The rules are simple, but the details decide whether you actually save tax. A long-term loss cannot touch a short-term gain. The Rs 1.25 lakh equity LTCG exemption applies only after losses are set off. For shares, a same-day sell and buy may not realise a loss at all. This guide covers all of it for FY 2026-27, the first year under the Income-tax Act, 2025, which replaced the 1961 Act from 1 April 2026. The new Act renumbers the sections but keeps the capital loss rules unchanged. This article uses the familiar 1961 Act section numbers.
Key takeaways
- STCL can be set off against STCG and LTCG. LTCL can be set off only against LTCG.
- Equity STCG: 20%. Equity LTCG: 12.5% above Rs 1.25 lakh. Add 4% cess.
- Losses are set off before the Rs 1.25 lakh exemption, so harvest only what reduces taxable gains.
- Unused capital losses carry forward for 8 years if you file ITR-2 or ITR-3 by the due date.
- India has no wash-sale rule, but for shares, buy back on the next trading day, not the same day.
- Harvest window for FY 2026-27: up to 31 March 2027, with a buffer of a few working days.
What Is Tax Loss Harvesting?
A fall in the market value of your holdings is an unrealised loss. It has no tax value until you sell, redeem or switch the units. Once you sell, the loss becomes a realised capital loss, and the law requires you to set it off against capital gains of the same year.
Simple Example
You booked Rs 3,00,000 of long-term gains from Equity Fund A this year. Equity Fund B, held for over a year, shows an unrealised loss of Rs 2,00,000.
| Particulars | Without harvesting | With harvesting |
|---|---|---|
| LTCG from Fund A | Rs 3,00,000 | Rs 3,00,000 |
| LTCL from selling Fund B | Nil | (Rs 2,00,000) |
| Net LTCG | Rs 3,00,000 | Rs 1,00,000 |
| Less: Section 112A exemption | (Rs 1,25,000) | (Rs 1,00,000), limited to the gain |
| Taxable LTCG | Rs 1,75,000 | Nil |
| Tax at 12.5% | Rs 21,875 | Nil |
| Tax saved (before cess) | Rs 21,875 |
Notice that the saving is Rs 21,875, not 12.5% of the full Rs 2,00,000 loss. Only Rs 1,75,000 of the gain was taxable. Harvesting Rs 1,75,000 of loss would have saved exactly the same tax. The extra Rs 25,000 of loss was used up against a gain that was already exempt. That is the Rs 1.25 lakh trap, covered below.
The Set-Off Rules
Within the Capital Gains Head (Section 70)
| Loss | Can be set off against |
|---|---|
| Short-term capital loss (STCL) | STCG and LTCG |
| Long-term capital loss (LTCL) | LTCG only |
Set-off within the year is compulsory. You cannot keep a current-year loss aside to carry forward while you have current-year gains it can absorb.
Against Other Heads (Section 71)
A capital loss cannot be set off against salary, house property, business or other sources income. It stays within capital gains.
Carry Forward (Sections 74 and 80)
Capital loss that is not absorbed carries forward for 8 assessment years. Brought-forward STCL can be set off against any capital gain, and brought-forward LTCL only against LTCG. The condition that trips people up: the return for the loss year must be filed by the due date under Section 139(1). For FY 2026-27, that is expected to be 31 July 2027 for ITR-2 and 31 August 2027 for non-audit ITR-3. A belated return loses the carry forward.
For the full framework across all heads, see our guide to set-off and carry forward of losses.
Equity Shares and Equity Mutual Funds
Listed equity shares and equity-oriented funds are the main harvesting universe. A holding of more than 12 months is long-term.
| Gain | Section | Rate |
|---|---|---|
| STCG (12 months or less, STT paid) | 111A | 20% |
| LTCG (more than 12 months, STT paid) | 112A | 12.5% above Rs 1.25 lakh a year, no indexation |
Rates are for transfers after 23 July 2024 and apply unchanged in FY 2026-27. Add 4% health and education cess. Surcharge on these gains is capped at 15%. See capital gains tax on LTCG and STCG for the full rate table.
Worked Example: Partial Harvest
- LTCG booked from Equity Fund A: Rs 3,00,000
- Unrealised long-term loss in Equity Fund B: Rs 1,50,000
| Particulars | Amount |
|---|---|
| LTCG (Fund A) | Rs 3,00,000 |
| Less: LTCL (Fund B) | (Rs 1,50,000) |
| Net LTCG | Rs 1,50,000 |
| Less: Section 112A exemption | (Rs 1,25,000) |
| Taxable LTCG | Rs 25,000 |
| Tax at 12.5% | Rs 3,125 |
Without harvesting, tax would be Rs 21,875 on Rs 1,75,000. Tax saved: Rs 18,750 before cess (Rs 19,500 with 4% cess).
Harvesting Short-Term Losses Is Worth More
An STCL can absorb STCG taxed at 20%, while an LTCL can only absorb LTCG taxed at 12.5%. If you have both short-term gains and a choice of which losses to book, use STCL against STCG first.
The Rs 1.25 Lakh Exemption Trap
Losses are set off before the Section 112A exemption is applied. The useful amount of long-term loss to harvest is therefore:
Useful LTCL = Total LTCG for the year minus Rs 1,25,000
| Your LTCG | LTCL harvested | Net LTCG | Taxable | Result |
|---|---|---|---|---|
| Rs 1,00,000 | Rs 50,000 | Rs 50,000 | Nil | No saving. The gain was already exempt |
| Rs 2,00,000 | Rs 75,000 | Rs 1,25,000 | Nil | Saves Rs 9,375, the full benefit |
| Rs 2,00,000 | Rs 1,50,000 | Rs 50,000 | Nil | Still saves Rs 9,375. The extra Rs 75,000 of loss is wasted |
Why "wasted"? If you had not sold, that position could still have been sold in a later year, and the loss would have been available against that year's taxable gains. Booking it now uses it up against exempt income. If you want to keep the investment, you also buy back at a lower cost, which means a larger taxable gain later.
Rule: Harvest long-term losses only up to the amount by which your LTCG exceeds Rs 1.25 lakh. Short-term losses are different: STCG has no exemption, so every rupee of STCL used against STCG saves tax.
The Flip Side: Tax Gain Harvesting
If your LTCG for the year is below Rs 1.25 lakh, consider the opposite move. Sell long-term holdings with gains up to the unused exemption and buy them back the next trading day. The gain is tax-free and your cost goes up, which reduces future taxable LTCG.
Debt Mutual Funds
Section 50AA, inserted by the Finance Act 2023, treats gains on specified mutual funds bought on or after 1 April 2023 as short-term, whatever the holding period, taxed at your slab rate. From FY 2025-26, a specified mutual fund means a fund that invests more than 65% in debt and money market instruments (and funds of funds investing mainly in such funds).
A loss on these units is a deemed short-term capital loss. Because STCL can be set off against any capital gain, a loss on a debt fund can absorb equity STCG (20%) or LTCG (12.5%).
| Units bought | Holding period | Treatment |
|---|---|---|
| On or after 1 April 2023 (specified fund) | Any | Short-term, slab rate. Losses are STCL |
| Before 1 April 2023 | More than 24 months | LTCG at 12.5% without indexation |
| Before 1 April 2023 | 24 months or less | STCG at slab rate |
Debt funds rarely show losses, since their NAVs usually rise steadily. The opportunity is mainly in credit-risk or long-duration funds after a rate rise or a default.
Step-by-Step Execution for FY 2026-27
Step 1: Pull Your Capital Gains Statements (January 2027)
Download the realised gains report from your broker and the consolidated capital gains statement from CAMS/KFintech (or MF Central). Add up STCG and LTCG booked so far in FY 2026-27, including gains you still expect to book before 31 March.
Step 2: List Unrealised Losses by Lot
For each holding with a loss, note whether each lot is short-term or long-term on the date you plan to sell. A lot bought in March 2026 turns long-term after 12 months, which changes the type of loss.
Step 3: Size the Harvest
| Gain to absorb | Best loss to use | How much |
|---|---|---|
| STCG (equity or other) | STCL | Up to the full STCG |
| LTCG (equity) | STCL or LTCL | Up to LTCG minus Rs 1.25 lakh |
Check exit loads and brokerage before you sell. An exit load of 1% on a large redemption can eat the tax saving.
Step 4: Sell, Then Buy Back if You Want the Exposure
- Shares: Sell on day 1 and buy back on day 2. If you sell holdings and buy the same stock on the same day in the same account, most brokers net the two as an intraday trade. Your original shares stay in demat and no loss is realised.
- Mutual funds: Redeem the units. A fresh purchase, even on the same day, is a separate transaction at that day's NAV. Remember that a new purchase restarts the holding period.
India has no wash-sale rule. Keep the transactions genuine: two separate trades at market prices, reported as they happened. Section 94(7) and 94(8) (dividend and bonus stripping) can disallow losses where units are bought just before a record date and sold soon after. Normal harvesting does not trigger them, but avoid trades around dividend or bonus record dates.
Step 5: Finish Before 31 March 2027
The loss belongs to the year in which you sell (the trade date for shares, the redemption date for fund units). Leave a buffer of a few working days: late-March market holidays and fund cut-off times (3 pm for most schemes) can push a redemption into the next year. Aim to finish by about 25 March.
Step 6: File on Time
Report the losses in Schedule CG of ITR-2 or ITR-3 and file by the due date so that any unused loss carries forward through Schedule CFL.
SIP Portfolios and FIFO
Each SIP instalment is a separate purchase lot. When you redeem, units are treated as sold on a first in, first out (FIFO) basis within the folio. The same applies to shares held in a demat account.
For a review in January 2027:
| Lot | Bought | Holding period in January 2027 | Loss type if sold |
|---|---|---|---|
| Lot 1 | January 2025 | 24 months | LTCL |
| Lot 2 | December 2025 | 13 months | LTCL |
| Lot 3 | June 2026 | 7 months | STCL |
Under FIFO you cannot choose to sell only Lot 3. To reach it, you must first redeem Lots 1 and 2. If the older lots are at a gain, the redemption books that gain too, which may cancel the loss you wanted. Investors who plan to harvest regularly often start separate folios for new SIPs so that recent lots can be redeemed on their own.
Common Mistakes
| Mistake | Why it hurts |
|---|---|
| Using LTCL against STCG | Not allowed. LTCL absorbs only LTCG |
| Harvesting LTCL when LTCG is below Rs 1.25 lakh | The gain was already exempt; the loss is used up for nothing |
| Same-day sell and buy of the same share | Usually netted as intraday, so no loss is realised |
| Counting intraday losses as capital losses | Intraday equity losses are speculative. They offset only speculative income and carry forward for 4 years |
| Ignoring exit loads and costs | They can exceed the tax saved |
| Filing ITR late | Unused capital loss cannot be carried forward from a belated return |
| Filing ITR-1 or ITR-4 | These forms do not carry capital losses forward; use ITR-2 or ITR-3 |
Where Tax Garden Helps
Getting harvesting right means knowing your exact gains, the lot-wise holding periods and how much loss is actually worth booking. Getting the filing right means reporting it in the correct schedules before the due date. Tax Garden can help you:
- Reconcile broker and CAMS/KFintech capital gains statements for FY 2026-27
- Work out how much STCL or LTCL to book before 31 March 2027
- Check lot-wise holding periods for SIP portfolios
- File ITR-2 or ITR-3 on time with Schedules CG and CFL completed
- Reply to AIS mismatch and capital gains notices
Looking for expert help with Plan your capital gains tax and ITR filing for FY 2026-27? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant. End-to-end filings, notices, and deadline tracking, all in one place.
Rates and rules are as of 18 September 2026 and assume no change for FY 2026-27 beyond what is stated. Check incometaxindia.gov.in for any later amendment before acting. This article is general information, not investment or tax advice for your specific situation.
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