Understanding tax harvesting for maximum savings in India
- AssetPlus
- 3 days ago
- 8 min read
Tax harvesting involves selling or repurchasing mutual funds, equities, or other securities to offset gains or losses for tax efficiency. It is a strategy to reduce capital gains tax by selling investments to claim exemptions or offset gains with losses.
Tax harvesting is a smart way to maximize income tax savings by reducing long-term capital gains tax. It's especially useful for mutual fund and equity investors. Ideal for individuals with taxable profits over ₹1.25 lakh annually, this strategy helps lower your tax burden and improve overall investment efficiency.
This guide explains how tax harvesting works, its significance, and how to utilize it to your advantage. It provides insights on capital gains taxation in India, including step-by-step strategies, timing tips, how your mutual fund distributor can assist, and common mistakes to avoid.
How Capital Gains are Taxed in India
Capital gains are profits earned after selling capital assets like mutual funds, real estate, stocks, etc.
Short-term capital gains (STCG) are when you sell stocks or mutual funds in less than 12 months (equity) or 36 months (debt investments).
Long-term capital gains(LTCG) are when you sell stocks or mutual funds after 12 months (equity) and 26 months (debt investments).
Here is a brief explanation:
Asset Type | Short-Term Capital Gain (STCG) | Long-Term Capital Gain (LTCG) |
Equity Shares and Equity-Oriented Mutual Funds | 12 months or less | >12 months |
Debt Mutual Funds (post April 1, 2023) | All gains are short-term, regardless of the holding period | No LTCG benefit |
Unlisted Shares and Immovable Property (land/building) | 24 months or less | >24 months |
Gold, Jewellery, Art, etc. | 36 months or less | >36 months |
As per Budget 2023, indexation and LTCG benefits have been removed for debt mutual funds (less than 35% equity exposure), effective April 1, 2023.
Equity and Debt Funds Capital Gains Classification and Tax Rates (FY 2025)
Asset Type | Holding Period | STCG Rate | LTCG Rate | LTCG Exemption | Indexation |
Equity Shares & Equity MFs | ≤ 12 months | 20% | 12.5% | ₹1.25 lakh/year | Not Available |
Debt Mutual Funds | ≤ 36 months | As per the IT slab | As per the IT slab | Not Applicable | Not Available (Post-Apr 2023) |
Hybrid Funds (>35% equity) | As per the above classification | Based on equity rules | Based on equity rules | ₹1.25 lakh/year | Not Available |
What About Indexation?
Earlier in FY 2023–24, long-term investments in debt mutual funds benefited from indexation, inflation adjustment on the cost base, and lower taxable gains. However, after the 2023 amendment, you can claim the benefit only if your fund is a non-equity-oriented hybrid with a holding of more than 35% equity.
How Does Tax Harvesting Work in India?
Tax harvesting, also called tax loss harvesting in India, is a disciplined way of investing in tax savings and capital gains without altering your portfolio exposure. Here is how it works:
Sell and Rebuy Strategy
Investors can sell and buy back securities at a marginal profit or loss and repurchase them in minutes. This realizes the profit or loss on paper for taxation purposes and maintains the long-term investment perspective.
Let's say your equity mutual fund has a long-term gain of ₹90,000. You offload it, show the gain on tax books (which is below the ₹1.25 lakh exemption threshold), and reinvest the amount to reset your cost base.
Using the ₹1.25 Lakh LTCG Exemption
According to 2025 financial planning trends, all experts suggest investing up to ₹1.25 lakh (considering ₹ 25,000 of the gain realized from other funds) to avail of the exemption without exposing risk. You can:
Sell units value of up to ₹1.25 lakh of gain.
Renew or move to another scheme with similar characteristics.
Help exempt long-term gains and save future taxable gains.
Realizing Losses to Offset Other Gains
If you've generated short-term capital gains in an investment category (i.e., stocks), you can sell underperforming funds at a loss. With these losses, you can offset your STCG gains and reduce your tax burden.
AssetPlus Advantage:
No more deciphering complicated tax rules on your own with professional guidance from AssetPlus. This leading MFD platform provides:
Savvy tax harvesting capability integrated into your investment console.
Tax optimization goal-based portfolio advice.
Threshold-based gain/loss switch recommendations.
Real-time tracking of realized and unrealized capital gains.
Tax Harvesting Strategies for Mutual Fund Investors
For tax-saving investing, align tax harvesting strategies with mutual fund portfolios to minimize tax outflow while remaining invested. Here are some tips:
1. Equity Mutual Funds: Selling Units Strategically Before the End of the Year
Tax harvesting of equity mutual funds is a process of selling units with gains nearest but less than the ₹1.25 lakh exemption limit for long-term capital gain tax.
In this way, before the end of the year, you realize the gains up to the exempted amount, avoid paying tax on it, and start accumulating again at the purchase NAV. If the markets continue their momentum, your future tax outlay on the same investment will be saved.
2. Direct Stocks: Recording Gains to Reset Cost Base
Share market investors can rebuy and sell shares with a profit of up to ₹1.25 lakh to generate tax-free profits. This is helpful in market volatility, as resetting the cost base occasionally minimizes the short-term capital gains tax in future years.
3. Indexation Planning and Debt Funds
Even as indexation benefits have been partially withdrawn for debt funds (until Budget 2023–2024), hybrid funds with more than 35% equity exposure still offer some planning advantage. Investors can harvest losses in non-performing debt funds, allowing gains in other categories to be offset.
Timing Tax Harvesting
Timing is everything when it comes to tax harvesting in India. Instead of focusing on capital gain harvesting towards the end of the financial year (March), spread it over the year for better value.
End-of-Year Harvesting
At the close of the financial year, the investors can see all the unrealized gains or losses and decide which positions to close. This is useful for year-end tax planning, especially when nearing the ₹1.25 lakh LTCG threshold.
Mid-Year Harvesting
Mid-year harvesting of taxes allows you to diversify exit load and reinvestment risk. Markets zigzag and a mid-year harvest provides for flexibility in reinvestment decisions without March-month pressure.
Time harvesting activity according to market downturns or booms synchronizes capital gains tax planning and market performance advantage.
How to Do Tax Harvesting in India with the Help of Your MFD
A registered Mutual Fund Distributor plays a pivotal role in helping investors adopt mutual fund tax harvesting strategies methodically and efficiently.
Role of MFDs in Planning
MFDs guide you through customized plans based on your income, goals, and tax slab. They assess fund performance, gains across various folios, and when to book profits or losses, offering an insight into how tax in India can be saved through legal and data-driven methods.
Tools and Reports Provided by AssetPlus
With tools such as AssetPlus, MFDs are given efficient tools that make the tax planning process much better:
Reports & Notes: Fund-wise performance, realized/unrealized gains, the impact of exit load
Webinars & Meetups: Information on harvesting methods and fund switch recommendations
BizGuru: Space for concept discussion, FAQs, and expert opinion
Goal-Based Planning & Dashboards: Relates harvesting to real-life financial goals
Calculators: From SIP returns and SWP planning to NPS, EMI, inflation, and retirement planning in one ecosystem
24/7 Professional Support: Technical and strategic guidance at any time throughout your financial journey
Tax harvesting in India, with the expertise of an MFD, is a tax-saving measure that becomes part of your overall income tax-saving strategy.
Common Mistakes to Avoid
While tax harvesting in India is a valuable strategy, many investors unintentionally undermine its effectiveness by making avoidable errors:
Not Repurchasing Promptly and Losing Market Exposure
Not purchasing the same or equivalent mutual fund or stock back after disposing of the stock can lead to losing out on the market. This discontinues the compounding effect in the long term and can lead to purchasing it back at a higher cost.
Selling in a Losing Year When Income Is Already Low
If your present income is already under the taxable threshold, tax loss harvesting in India does not incur any additional advantage. In such a case, it is wiser to carry losses over to offset future short-term capital gains tax or LTCG payments.
Undermining Transaction Costs and Exit Loads
The mutual fund exit charges and brokerage in stocks would overturn the tax benefit if not factored in. Always check if the tax savings from mutual fund tax harvesting are greater than operational costs before entering trades.
Real-Life Example/Case Study
A 34-year-old salaried investor has equity mutual fund units purchased three years ago. The fund's value has appreciated by ₹1.75 lakh. The investor is willing to do mutual fund tax harvesting to restrict potential tax outgo during the current financial year.
Objective: Maximize the ₹1.25 lakh long-term capital gains exemption, rebase cost base, and reinvest without compromising market exposure.
Strategy Table: Tax Harvesting Plan (FY 2025)
Action | Details |
Fund Name | Large Cap Equity Fund |
Holding Period | 3+ years (LTCG applicable) |
Unrealized Gain | ₹1.75 lakh |
Sell Units Worth | ₹1.25 lakh in gains |
Rebuy Timing | Same day (NAV difference minimal) |
Tax Liability | Nil (₹1.25 lakh LTCG exemption utilized) |
Cost Base After Reinvestment | The new NAV becomes the revised purchase cost. |
Outcome:
₹1.25 lakh gain harvested tax-free under the updated long-term capital gains exemption limit.
The remaining ₹50,000 in unrealized LTCG is retained for future harvesting.
No disruption to market exposure or asset allocation.
Effective tax saving: ₹15,625 (calculated as 12.5% of ₹1.25 lakh, which would have been the LTCG tax payable without harvesting)
This example shows how professional help with tax planning leads to more thoughtful execution and higher net proceeds. AssetPlus tools facilitate this by automated tracking and fund choice to optimize such opportunities.
Conclusion
Tax harvesting in India is a practical way of maximizing after-tax returns through clever capital gains tax planning. Whether investing in equity mutual funds, direct equities, or hybrid products, timing your investment activity along with tax planning ensures that you retain more of what you have earned.
The earlier you incorporate income tax saving strategies like harvesting on your planning calendar, the more certain the benefits.
Speak to your Mutual Fund Distributor today or try AssetPlus to identify harvesting opportunities, review fund switches, and simplify your financial year-end tax planning.
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FAQs
Can I harvest capital gains more than once during a financial year?
Yes, you can tax harvest mutual funds more than once yearly if the combined gains don't exceed the ₹1.25 lakh LTCG deduction threshold. However, make sure each transaction is worth the cost-benefit after considering exit loads and market movements.
Is tax harvesting suitable for salaried investors who invest mostly in SIPs?
Will tax harvesting affect my long-term investment goals?
Does tax loss harvesting decrease taxes in future years as well?
Can we automate tax harvesting or plan it online?