Highlights:

  • Capital loss set-off rules: Short-term capital losses (STCL) offset both STCG and LTCG; long-term capital losses (LTCL) only offset LTCG.
  • 8-year carry-forward: Unutilised losses carry forward for up to 8 assessment years, but only if the ITR is filed by the due date u/s 139(1).
  • March 31 deadline: Losses must be realised by March 31 of the financial year.
  • No wash-sale rule: Immediate repurchase of the same securities is allowed, facilitating rebalancing.

Introduction

Your equity portfolio shows ₹2 lakh in unrealised gains and ₹50,000 in unrealised losses. Strategically selling loss-making holdings can offset gains, reducing taxable capital gains under current rules (equity LTCG at 12.5% above ₹1.25 lakh exemption; equity STCG at 20%)

Tax-loss harvesting involves selling securities at a loss to generate capital losses that offset taxable capital gains. It is a legal strategy under the Income Tax Act

What Is Tax-Loss Harvesting and How It Works in India

Tax-loss harvesting realises capital losses to reduce net taxable capital gains in the same financial year. Unabsorbed losses carry forward for up to 8 assessment years.

Example: Book ₹50,000 loss against ₹2 lakh gain → net taxable gain reduces to ₹1.5 lakh (after applying exemptions where applicable). This lowers tax at applicable rates.

Losses offer flexibility; you are not required to realise gains immediately to utilise them.

Capital Loss Set-Off Rules Under Indian Tax Law

Tax rules distinguish between Short-Term Capital Losses (STCL) and Long-Term Capital Losses (LTCL) based on holding periods. For listed equity shares and equity-oriented mutual funds, a holding period of up to 12 months is considered short-term, while more than 12 months is long-term. Note: Unlisted equity shares require a 24-month holding period to qualify as long-term and do not qualify for the ₹1.25 lakh exemption.

Set-Off Rules (per Income-tax law):

  • STCL: Can be set off against both STCG and LTCG.
  • LTCL: Can only be set off against LTCG.

Carry Forward: Both STCL and LTCL can be carried forward for 8 assessment years, provided the return is filed on time.

Current Rates Context: Equity LTCG taxed at 12.5% (gains exceeding ₹1.25 lakh exemption); STCG at 20% (for equity with STT).

Step-by-Step Process to Execute Tax-Loss Harvesting

  • Review portfolio for unrealised gains and losses.
  • Calculate net tax impact, prioritising STCL for broader offset.
  • Sell loss-making securities by March 31 (the trade date determines the FY).
  • Repurchase immediately if desired (no wash-sale restriction in India).
  • File ITR by the due date under Section 139(1) (typically July 31 for non-audit cases) to preserve carry-forward.

Critical Deadline: March 31, 2027, for FY 2026-27.

Common Mistakes and ITR Filing Requirements

  • Missing the ITR filing deadline under Section 139(1) forfeits carry-forward of losses.
  • Incorrect set-off (e.g., assuming LTCL offsets STCG).
  • Selling losses after March 31.
  • Failing to report carry-forward losses in subsequent ITRs (Schedule CG).
  • Not keeping contract notes and records for verification.

Tax-loss harvesting is especially effective for diversified portfolios, allowing rebalancing toward stronger positions while managing tax liability.

Taking Control of Your Tax Liability

Tax-loss harvesting converts unrealised losses into tax savings and portfolio optimisation. The 8-year carry-forward, combined with no repurchase restrictions, provides significant flexibility, but requires timely action before March 31 and proper ITR filing. Review holdings immediately, execute strategic sales, and ensure timely compliance.

FAQs

1. What is the deadline for tax-loss harvesting in India?

Realise losses by March 31 of the financial year. File ITR by the Section 139(1) due date to carry forward unutilised losses.

2. Can short-term capital losses offset long-term capital gains?

Yes. STCL can offset both STCG and LTCG; LTCL only offsets LTCG.

3. How many years can I carry forward capital losses in India?

Up to 8 assessment years, provided the ITR is filed on time in the year the loss is incurred.

4. Is tax-loss harvesting legal in India?

Yes, permitted under the set-off and carry-forward provisions of the Income Tax Act. India has no wash-sale rule.

5. Do I need to report carried-forward losses every year?

Yes. Even if you have no capital gains in a particular year, you must report carried-forward losses in your ITR to maintain their validity for future years until they’re fully utilised or expire.