After two years of a flat market, many portfolios hold a mix: some older investments still in profit, some newer ones in loss. That mix creates a legitimate tax opportunity. Used carefully, the losses you are sitting on can reduce the tax on gains you have already booked this year. Used carelessly, they can be wasted, or cost you more in fees than they save. Here is how it works, with a fully worked example. It is part of our guide to investing in a flat market.
This is general information, not tax or investment advice. Tax rules change; confirm your position with a chartered accountant, and consider a SEBI-registered investment adviser for investment decisions.
The rules you need (as of October 2026)
The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026 and introduced the single “tax year” in place of previous year and assessment year. Many people still refer to the old section numbers (111A, 112A). The rates and set-off rules below are as published by the Income Tax Department for listed equity shares and equity-oriented mutual fund units on which securities transaction tax (STT) is paid.
| Listed equity and equity funds | Short-term | Long-term |
|---|---|---|
| Holding period | 12 months or less | More than 12 months |
| Tax rate (transfers on or after 23 July 2024) | 20% | 12.5% on gains above ₹1.25 lakh a year |
| A loss of this type can be set off against | Short-term and long-term gains | Long-term gains only |
| Unused loss carried forward | Up to 8 years, only if the return for the loss year is filed by the due date | |
Health and education cess of 4% applies on the tax plus any surcharge. Capital losses cannot be set off against salary or other income.
How tax-loss harvesting works
A worked example
An illustrative profile, not a real customer. In tax year 2026-27, Anita, a salaried professional, has already:
- sold an equity fund she held for four years, with a long-term gain of ₹2,50,000;
- sold some shares held for seven months, with a short-term gain of ₹40,000.
She also holds another equity fund bought eight months ago that is now ₹60,000 below cost, an unrealised short-term loss.
| Without harvesting | With ₹60,000 loss harvested | |
|---|---|---|
| Short-term gain | ₹40,000 | ₹40,000 − ₹40,000 of the loss = ₹0 |
| Tax on short-term gain at 20% | ₹8,000 | ₹0 |
| Long-term gain | ₹2,50,000 | ₹2,50,000 − remaining ₹20,000 of the loss = ₹2,30,000 |
| Less ₹1.25 lakh exemption | ₹1,25,000 taxable | ₹1,05,000 taxable |
| Tax on long-term gain at 12.5% | ₹15,625 | ₹13,125 |
| Total capital-gains tax (before cess) | ₹23,625 | ₹13,125 |
Anita’s capital-gains tax before cess
Illustrative. Bars drawn at 1px per ₹100. The ₹13,125 after harvesting is all long-term tax. Assumes no surcharge, no other capital gains or losses, and that the short-term loss is set off first against the short-term gain (taxed at the higher rate). Transaction costs are ignored here but covered below.
Notice why the short-term loss was so valuable: it wiped out a gain taxed at 20%, and the rest still reduced a gain taxed at 12.5%. A long-term loss could only have reduced the long-term gain.
Five traps that can cancel the benefit
Harvesting when your gains are under ₹1.25 lakh anyway
Losses are set off against gains before the ₹1.25 lakh exemption is applied. If your long-term gains are already below ₹1.25 lakh, harvesting a loss saves no tax this year and uses up a loss you could otherwise have kept for later. Run the numbers first.
Costs that exceed the saving
Brokerage, STT, stamp duty, exchange charges and any exit load on mutual funds all add up. On a small loss, they can be larger than the tax saved.
Resetting the holding period
If you buy back after selling, the clock restarts. A future gain on the new purchase will be short-term (20%) if sold within 12 months, instead of long-term (12.5%).
Missing the deadline or the return
The sale must fall within the tax year, so do not leave it to the last trading day; settlement and fund cut-off times can push a transaction into the next year. And an unused loss carries forward only if you file your return by the due date.
Treating it as a reason to trade
Tax should not drive your investment decisions. Selling something you would otherwise hold, only to save a few thousand rupees, can cost more if it changes your long-term plan.
Can I sell and buy back the same investment?
Indian tax law does not have a general US-style “wash-sale” rule. However, specific anti-avoidance provisions exist (for example on bonus and dividend stripping), and the General Anti-Avoidance Rules can apply to arrangements whose main purpose is to avoid tax. Some investors move to a different holding instead of buying back the same one. Because the line between sensible planning and avoidance depends on facts, discuss any sell-and-buy-back plan with a chartered accountant first.
The flip side: harvesting gains
The ₹1.25 lakh long-term exemption applies each tax year and is lost if unused. Some investors with older holdings in profit book up to that amount of long-term gain in a year, tax-free, which raises their cost for the future. In a flat market this matters less, because fewer holdings carry large gains, but it is worth knowing.
Where debt fits in
Tax-loss harvesting saves you some tax. Paying off a loan that charges 1% a day saves you far more, and with certainty. Before optimising your capital-gains bill, make sure costly debt is not quietly eating your salary. If you are juggling several loan-app loans, SmartSwitch replaces them with one Omozing EMI. And if you need cash while your portfolio is down, read need cash but your portfolio is in loss before you sell or borrow. Never borrow to invest; see why borrowing to invest hurts most in a flat market.
Need funds for a genuine expense?
If you need money for a real need and would rather not disturb a long-term plan, an Omozing personal loan comes with a Key Fact Statement showing the full cost before you sign. Rates from 11% a year; no upfront fees before approval.
Frequently asked questions
What is tax-loss harvesting in India?
It is selling an investment that is below its purchase cost so the realised capital loss can be set off against capital gains in the same tax year, reducing the tax payable. Unused losses can be carried forward for eight years if the return is filed on time.
Can short-term capital loss be set off against long-term capital gain?
Yes. A short-term capital loss can be set off against both short-term and long-term capital gains. A long-term capital loss can be set off only against long-term capital gains.
What are the current tax rates on equity capital gains?
As of October 2026, for listed equity and equity-oriented funds with STT paid, short-term gains are taxed at 20% and long-term gains at 12.5% on the amount above ₹1.25 lakh a year, plus 4% cess and any surcharge.
Can capital losses be set off against salary income?
No. Capital losses can only be set off against capital gains. Unused losses can be carried forward for up to eight years, provided you file your return by the due date.
Is there a wash-sale rule in India?
India has no general US-style wash-sale rule, but specific anti-avoidance provisions and the General Anti-Avoidance Rules can apply to arrangements made mainly to avoid tax. Speak to a chartered accountant before selling and buying back the same investment.
When should I do tax-loss harvesting?
Before the tax year ends on 31 March, leaving enough time for trades to settle and fund transactions to process. Many investors review their gains and losses in January or February rather than in the last week.
Sources (as of 22 October 2026): Income Tax Department (incometaxindia.gov.in): “Tax on short-term capital gains”, “Tax on long-term capital gains”, “Set off and carry forward of losses under the Income-tax law” and “Tax rates” (cess); Income-tax Act, 2025 commencement (1 April 2026). The worked example is illustrative. Check the official source before acting.
Omozing is the digital lending brand of Aparampaar Finance Private Limited, an RBI-registered non-deposit-taking NBFC. We do not offer investment or tax advice. This is general information, not investment advice; consider a SEBI-registered investment adviser for personal advice and a chartered accountant for tax. See our regulatory disclosures and grievance redressal process.