Tax-loss harvesting involves realizing capital losses in an equity portfolio to offset taxable capital gains realized within the same fiscal year, reducing overall tax liability under the provisions of the Indian Income Tax Act.
Equity Capital Gains Taxation in India
Equity securities and equity-oriented mutual funds held in India are subject to two distinct tax regimes based on holding period:
- Short-Term Capital Gains (STCG - Section 111A): Applies to listed equity shares and equity mutual funds held for less than 12 months. Taxed at a flat rate of 20% (plus applicable surcharge and cess).
- Long-Term Capital Gains (LTCG - Section 112A): Applies to listed equity securities held for 12 months or longer. Taxed at 12.5% on net gains exceeding the annual statutory exemption limit of ₹1,25,000.
Set-Off and Carry Forward Provisions
Under Sections 70 and 71 of the Income Tax Act: 1. Short-term capital losses can be set off against both short-term capital gains and long-term capital gains. 2. Long-term capital losses can only be set off against long-term capital gains (they cannot offset short-term gains). 3. Unabsorbed capital losses can be carried forward for up to 8 consecutive assessment years, provided the income tax return is filed on or before the prescribed due date under Section 139(1).
Implementation Considerations
Tax-loss harvesting is typically evaluated toward the close of the financial year (prior to March 31). Investors calculate net realized profits and selectively exit positions currently trading below their acquisition cost to neutralize taxable gains while maintaining asset allocation parameters.