Every financial year, resident individual investors are allowed to earn up to ₹1.25 lakh of long-term capital gains on listed equity shares and equity mutual funds without paying any tax on it. The exemption cannot be carried forward. If you do not use it by 31 March, it is simply lost. Tax-gain harvesting is the practice of deliberately using this allowance each year, and tax-loss harvesting is its companion for years when some investments are in the red.
The rules that apply this year
The Income-tax Act, 2025 came into force on 1 April 2026, replacing the 1961 Act. Section numbers and terminology have changed, with “Tax Year” replacing the earlier financial year and assessment year language, but Budget 2026 left capital gains rates and holding periods unchanged. For Tax Year 2026-27:
- Listed equity shares and equity-oriented mutual funds held for more than 12 months produce long-term gains, taxed at 12.5% on the amount above ₹1.25 lakh in the year.
- The same investments sold within 12 months produce short-term gains, taxed at 20%.
- Cess, and surcharge where applicable, is added on top.
- The ₹1.25 lakh exemption is available to resident individuals only, not to non-residents.
Importantly, the new regime’s rebate that makes ordinary income up to ₹12 lakh tax-free does not apply to these special-rate equity gains. Even an investor with modest income pays tax on long-term equity gains above the ₹1.25 lakh limit.
Tax-gain harvesting: how it works
Suppose you invested in an equity mutual fund three years ago and your units now show an unrealised long-term gain of ₹3 lakh. If you hold them for another five years and sell all at once, every rupee of gain above ₹1.25 lakh in that year will be taxed.
Instead, before 31 March, you can redeem just enough units to realise about ₹1.2 lakh of long-term gain and reinvest the proceeds immediately in the same or a similar fund. Three things happen:
- The gain you realise falls within the exemption, so no tax is payable on it.
- The reinvested units carry a new, higher purchase price, so that ₹1.2 lakh of gain is never taxed in future.
- Your market exposure stays essentially the same.
At a 12.5% rate plus 4% cess, ₹1.2 lakh of gain would otherwise attract about ₹15,600 of tax when eventually sold. Repeated every year over a long investing life, the saving becomes substantial. A married couple investing separately can each use their own exemption.
Tax-loss harvesting
If some of your holdings are trading below their purchase price and you have realised gains elsewhere during the year, selling the loss-making holdings can reduce your tax bill. In general terms:
- Short-term capital losses can be set off against both short-term and long-term gains.
- Long-term capital losses can be set off only against long-term gains.
- Unabsorbed capital losses can be carried forward to later years, but only if you file your income tax return by the due date.
Loss harvesting should never be the reason to exit a sound investment for good. If you still believe in the holding, you can sell to book the loss and buy it back. Do review the reasons for the loss first: an investment that is down because the underlying business or fund has deteriorated deserves a decision on its merits, not a tax-driven buy-back.
Practical points to get right
- Allow for settlement time. Trades must settle within the financial year. Complete harvesting by the last week of March rather than on 31 March itself, and check the stock exchange holiday calendar.
- Choose the right units. Mutual fund redemptions follow first-in, first-out. Make sure the units being redeemed have been held for more than 12 months, or the gain will be short-term and taxed at 20%.
- Watch exit loads. Units held for more than a year usually carry no exit load, but check the scheme’s terms.
- Remember the new holding period. Reinvested units start a fresh 12-month clock. That is fine for long-term investors, but do not redeem them again within a year.
- Count all your gains. Include gains from shares, equity funds, and any other sales in the year before deciding how much to harvest, so that the total stays within ₹1.25 lakh.
- Keep records. Download capital gains statements from your registrar (CAMS or KFintech) and broker. They make tax filing straightforward.
Who benefits most
Harvesting is most useful for long-term SIP investors whose equity holdings carry sizeable unrealised gains, and for anyone who expects to redeem a large amount in a single year in future, such as at retirement. It matters less for investors who are still early in their journey and have small gains. Debt fund units bought after 1 April 2023 are taxed at slab rates regardless of holding period, so this strategy does not apply to them.
The takeaway
Make a note in your calendar for early March each year. Review your long-term equity gains, harvest up to the ₹1.25 lakh limit, book any losses worth booking, and reinvest promptly. It takes an hour, involves no change in your investment strategy, and steadily reduces the tax you will owe on your eventual withdrawals.
This article is for general information only and does not constitute investment or tax advice. Set-off and carry-forward rules should be confirmed with a chartered accountant for your specific situation, particularly in the first years under the Income-tax Act, 2025.
