What You Need to Know Before Starting
If you invest in the Indian stock market and have ever sold a stock or mutual fund at a profit, you have paid capital gains tax. The government taxes your profits at 20% for short-term gains (stocks held 12 months or less) and 12.5% for long-term gains (stocks held over 12 months, above Rs 1,25,000).
Tax loss harvesting is a way to legally reduce this tax. The idea is simple: if you have stocks that are currently at a loss, you can sell them before the financial year ends on March 31. The loss from these sales reduces your taxable gains. Less taxable gain means less tax.
You do not need to be a tax expert to do this. You do not need a chartered accountant. You just need to follow four steps, which this guide walks you through in plain language.
One important thing upfront: this strategy only helps if you have already sold some stocks at a profit during the financial year. If you have not sold anything at a profit, there is nothing to reduce. We will cover this check in Step 1.
Also worth knowing: India has no restriction on buying back a stock after you sell it for tax purposes. You can sell a stock to book the loss and buy it back immediately. Your investment stays the same, but you get the tax benefit.
Step 1: Check Your Gains for the Year
Open your broker's app or website and find the section that shows your profit and loss for the current financial year (April 1 to March 31). In Zerodha, this is available in Console under the Tax P&L section. Other brokers have similar reports.
Look for two numbers:
- Short-term capital gains (STCG): Profits from stocks you bought and sold within 12 months. These are taxed at 20%.
- Long-term capital gains (LTCG): Profits from stocks you held for more than 12 months and then sold. These are taxed at 12.5%, but the first Rs 1,25,000 is tax-free.
Add up your total gains. This is the amount the government will tax. For example, if you have Rs 80,000 in STCG, you owe approximately Rs 16,640 in tax (Rs 80,000 x 20% + 4% cess).
If your total gains are zero or negative (meaning your losses already exceed your gains from regular trading), you do not need to harvest additional losses. The purpose of loss harvesting is to reduce positive gains.
Write down your STCG and LTCG amounts. You will need these in Step 3.
Step 2: Find Your Losing Stocks
Now look at the stocks and mutual funds currently in your portfolio. Find the ones that are trading below the price you paid for them. These are your losing positions.
For each losing position, note:
- The stock name
- How much you paid for it (your buy price)
- The current market price
- How many shares you hold
- When you bought it (this determines if the loss is short-term or long-term)
The loss amount for each stock is: (buy price - current price) x number of shares.
Example: You bought 50 shares of ITC at Rs 480 each. The current price is Rs 440. Your loss per share is Rs 40. Total loss: Rs 40 x 50 = Rs 2,000.
An important detail: if you bought the stock more than once (at different times and prices), the oldest purchase is considered sold first. This is called FIFO, or First In First Out. If your first purchase was at a low price and the stock is above that price, selling may not create a loss even if your most recent purchase was at a higher price.
Check each stock's oldest purchase price against the current price to confirm the sale would create a loss.
Make a list of all stocks where selling would create a loss. Separate them into short-term losses (held 12 months or less) and long-term losses (held over 12 months).
Step 3: Calculate How Much Tax You Will Save
Now match your losses from Step 2 against your gains from Step 1. Here are the rules for matching:
- Short-term losses first reduce short-term gains. This saves 20% in tax for every rupee of loss.
- If short-term losses are larger than short-term gains, the extra reduces long-term gains. This saves 12.5% per rupee.
- Long-term losses can only reduce long-term gains. They save 12.5% per rupee.
- Long-term losses cannot reduce short-term gains. This is a rule in Indian tax law.
Here is a simple example:
Your gains: STCG Rs 80,000. LTCG Rs 50,000. Your available losses: STCL Rs 60,000 from Stock X (short-term).
Calculation: - STCL Rs 60,000 offsets STCG Rs 80,000. Remaining STCG: Rs 20,000. - No excess STCL, so LTCG stays at Rs 50,000. - LTCG of Rs 50,000 is below Rs 1,25,000 exemption, so no LTCG tax. - STCG tax: Rs 20,000 x 20.8% = Rs 4,160.
Without harvesting, your STCG tax would have been Rs 80,000 x 20.8% = Rs 16,640.
Tax saved: Rs 16,640 - Rs 4,160 = Rs 12,480.
Is the saving worth the cost of selling? Selling and rebuying costs approximately Rs 200 to Rs 500 in brokerage and charges. A saving of Rs 12,480 clearly justifies the cost.
Step 4: Sell Before March 31 and Rebuy If You Want
Once you have identified which stocks to sell and confirmed the tax saving is worthwhile, execute the sales during stock market trading hours. Place a sell order on your broker's app just as you would for any regular trade.
After your sell order is executed, you have a choice:
Option A: Rebuy the same stock. If you still believe in the stock's future, buy it back immediately after selling. You keep the same investment, but you have locked in the tax loss. India allows this because there is no wash sale rule.
Option B: Do not rebuy. If you wanted to exit the stock anyway, this is even better. You get the tax benefit and free up the capital for better investments.
Option C: Buy a similar stock. Instead of buying back the exact same stock, you could invest in a similar company in the same sector. This is optional and purely an investment decision.
Important timing: Make sure your sell orders are placed at least a few trading days before March 31. Do not wait until the last minute. If there is a market holiday or a system glitch, you could miss the deadline.
After selling, keep a record of the trade: the stock name, sell date, sell price, quantity, and the loss amount. You will need this when filing your income tax return.
What Happens After You Harvest
After selling stocks to book losses, two things need to happen:
First, the losses automatically reduce your taxable capital gains for the financial year. You do not need to do anything special during the year. The reduction happens when you file your ITR.
Second, you must file your income tax return correctly. When filing your ITR (usually ITR-2 for investors with capital gains), report all your stock transactions in Schedule CG. The set-off of losses against gains should be computed and shown in this schedule.
If your total losses exceed your total gains, the excess loss is carried forward. This means you can use it to reduce gains in the next financial year, or up to 8 years from now. But there is a catch: you must file your ITR on or before the due date (usually July 31) for the carry-forward to be valid. Filing late means you lose the carry-forward permanently.
If you are new to filing ITR with capital gains, consider using an online tax filing platform or a chartered accountant for the first time. Once you see how the Schedule CG and Schedule CFL work, you can do it yourself in subsequent years.
The most important takeaway: file on time. Late filing is the number one reason investors lose the benefit of carried-forward losses.
Common Questions Beginners Ask
Is this legal? Yes. Tax loss harvesting is a standard, legal tax planning strategy. It is explicitly supported by the Income Tax Act under Sections 70 and 71. The tax department expects investors to use these provisions.
Will I get a notice from the tax department? No, not for routine loss harvesting. As long as you report all transactions correctly in your ITR, the set-off is automatic and expected.
Do I need to tell my broker? No. You simply sell stocks like any normal trade. The broker does not need to know your tax motivation. The trade executes the same way regardless.
What if I lose money on the rebuy? The rebuy is a new investment. If the stock falls further after your rebuy, that is a new unrealized loss. It does not affect the tax loss you already booked. You could potentially harvest this new loss in the next financial year.
Can I do this with mutual funds? Yes. The same rules apply to equity mutual funds. An STCL from a mutual fund can offset STCG from stocks, and vice versa. The only difference is that mutual fund redemptions happen at the day's closing NAV, and there may be an exit load within 12 months.
How much does it cost? Selling and buying back involves brokerage (Rs 20 per order on discount brokers like Zerodha), STT, GST, and other charges. For most trades, the total round-trip cost is Rs 200 to Rs 500. The tax saving almost always exceeds this.
A Real-Life Beginner Scenario
Let us walk through a complete beginner scenario from start to finish.
Meet Arjun. He is a salaried professional who started investing in stocks 2 years ago. His portfolio has 8 stocks and 2 equity mutual funds. During the current financial year, he sold Infosys for a profit of Rs 60,000 (STCG since he held it for 9 months).
In February, he checks his portfolio and sees that Zomato is down Rs 25,000 from his buy price (held 6 months), and Paytm is down Rs 35,000 from his buy price (held 4 months). Both are short-term.
Arjun's calculation: - STCG from Infosys: Rs 60,000 - Harvestable STCL from Zomato: Rs 25,000 - Harvestable STCL from Paytm: Rs 35,000 - Total harvestable STCL: Rs 60,000
If he sells both Zomato and Paytm: - Net STCG: Rs 60,000 - Rs 60,000 = Rs 0 - Tax owed: Rs 0 - Tax saved: Rs 60,000 x 20.8% = Rs 12,480
Arjun sells both stocks in the first week of March. He rebuys Zomato immediately because he still believes in the company. He does not rebuy Paytm because he has lost conviction.
Total transaction costs: approximately Rs 400 for the sell and rebuy trades. Net tax saving: Rs 12,480 - Rs 400 = Rs 12,080.
Arjun files his ITR before July 31, reports all transactions, and the set-off is applied automatically. He saves over Rs 12,000 for about 30 minutes of work.
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Analyze My Portfolio FreeFrequently Asked Questions
I am a complete beginner. Can I do tax loss harvesting myself?
Yes. If you can buy and sell stocks through your broker, you can do tax loss harvesting. Follow the 4 steps: check gains, find losses, calculate the savings, and sell before March 31. No special expertise is needed.
How much can a beginner save with tax loss harvesting?
It depends on your gains and available losses. A typical beginner with Rs 50,000 to Rs 1,00,000 in STCG and matching losses can save Rs 10,000 to Rs 20,000 per year. The savings grow with portfolio size.
What if I make a mistake?
The most common mistake is selling a stock that FIFO assigns to a profitable lot, creating a gain instead of a loss. Check your per-lot cost basis before selling. If you realize the mistake, the extra gain is taxable but does not create any penalty.
Do I need a chartered accountant to file my ITR after harvesting?
Not necessarily. Online tax filing platforms handle capital gains calculations. But if you are filing ITR-2 for the first time, a CA can help ensure the Schedule CG and Schedule CFL are filled correctly.