With just weeks left for the financial year to close on March 31, investors have a narrow but valuable window to trim their tax outgo. One of the most effective tools available is tax harvesting — a strategy that allows individuals to legally reduce capital gains tax by booking gains within the exemption limit and offsetting losses against profits.
Tax harvesting is not about chasing returns or timing the market. It is about managing capital gains proactively so that tax liability is optimised while the portfolio remains aligned with long-term goals.
Tax harvesting involves selling investments strategically to either:
Book long-term gains within the annual tax-free limit of Rs 1.25 lakh
Realise capital losses that can be set off against taxable gains
Since March 31 marks the end of the financial year, all gains and losses must be booked before this date to count for the current year’s tax calculation.
There are two broad approaches — tax-gain harvesting and tax-loss harvesting.
Under Section 112A, long-term capital gains (LTCG) from listed equity shares and equity mutual funds are tax-free up to Rs 1.25 lakh per financial year. If an investor has not utilised this limit, they can sell part of their holdings to realise gains up to this threshold without paying tax, and then reinvest the proceeds.
This strategy resets the purchase price higher, potentially reducing future tax liability.
Many investors fail to use this exemption simply because they do not review their portfolios before year-end. Systematic rebalancing can help capture this benefit.
Tax-loss harvesting works by selling investments that are currently in the red. The realised loss can then be used to offset taxable capital gains.
Key rules to remember:
Short-term capital losses can be set off against both short-term and long-term capital gains.
Long-term capital losses can be set off only against long-term capital gains.
Losses that cannot be fully adjusted can be carried forward to future years, subject to tax rules.
Investors should avoid immediately repurchasing the same securities merely to create artificial losses, as this could invite scrutiny. Instead, tax harvesting should be part of genuine portfolio re-balancing.
Also, debt mutual funds purchased on or after April 1, 2023 are treated as short-term capital assets under Section 50AA, regardless of holding period. Gains from these are taxed as short-term.
Used carefully, tax harvesting can improve post-tax returns and enhance long-term portfolio efficiency without altering overall investment strategy.
