Tax-loss harvesting is a mechanism available under Indian tax law that allows investors to offset capital gains by realising capital losses. This practice, when executed within the regulatory framework of the Income Tax Act, 1961, may help reduce taxable capital gains and optimise tax reporting.
This guide outlines the permitted use of tax-loss harvesting, the key conditions to observe, and recent regulatory considerations.
What Is Tax-Loss Harvesting?
Tax-loss harvesting refers to the act of selling capital assets that have declined in value in order to realise a capital loss. These losses may then be used to offset capital gains incurred in the same financial year, thereby reducing the investor’s taxable gain.
Under Section 70 and Section 71 of the Income Tax Act, 1961:
- Short-Term Capital Losses (STCL) may be set off against both short-term and long-term capital gains.
- Long-Term Capital Losses (LTCL) may be set off only against long-term capital gains.
Unutilised capital losses can be carried forward for up to eight assessment years, provided the income tax return (ITR) is filed before the prescribed due date.
Example: If an investor realises ₹3,00,000 in capital gains and ₹1,00,000 in capital losses during the same financial year, the taxable capital gain is ₹2,00,000. The actual tax implication depends on the applicable tax rates based on asset class and holding period.
Conditions for Set-Off and Carry Forward
- Losses must be incurred through the sale or transfer of capital assets as defined under the Act.
- STCL may be set off against any capital gain.
- LTCL may only be offset against LTCG.
- Carry forward of losses is permitted for up to 8 years, subject to timely ITR filing.
Regulatory Guidance on Transaction Timing
India does not currently have a formal “wash-sale” rule (as defined in U.S. tax law). However, regulatory authorities such as SEBI may review transactions that suggest artificial loss creation followed by rapid repurchase of the same or substantially identical securities. Investors should maintain adequate records and ensure all transactions reflect genuine investment intent.
Implementation Considerations
When evaluating tax-loss harvesting, investors may:
- Review their portfolios to identify underperforming assets.
- Assess capital gains for the financial year.
- Calculate potential tax impacts before initiating transactions.
- Consider asset-class holding periods to determine STCG vs LTCG.
- Avoid repurchasing the same security within a short period.
- Maintain all transaction records and related documentation.
- Report realised losses in the ITR to enable carry forward.
Temporary Provision for FY 2025–26
The proposed Income Tax Bill, 2025 includes a one-time measure allowing long-term capital losses (LTCL) incurred up to March 31, 2026, to be set off against short-term capital gains (STCG). This change, if enacted, would apply from assessment year 2026–27 onwards. Official confirmation is awaited.
Additional Notes
- Tax-loss harvesting should align with long-term investment goals.
- Investors are advised to consider all related transaction costs.
- Frequent trading may increase costs and introduce reinvestment risk.
Disclaimer
This document is for informational purposes only and does not constitute financial/tax advice or an offer to purchase any financial product. Investments in securities markets are subject to market risks. Read all related documents carefully before investing. Past performance is not indicative of future results. Illustrations in this article are for educational purposes only and do not constitute investment advice.
Sources:
https://www.incometax.gov.in/iec/foportal/help/e-filing-itr2-form-faq?
https://incometaxindia.gov.in/Pages/faqs.aspx?k=FAQs+on+Set+Off+and+Carry+Forward+of+Losses