Tax-loss harvesting: legally cut your capital gains tax

Why this year is different

Tax-loss harvesting usually matters to a handful of investors. This year it applies to far more of them, because a lot of equity funds are below where they were twelve months ago.

Of 543 actively managed equity funds (Direct plan, Growth option, ETFs and segregated portfolios excluded), 243 had a negative one-year return in the year to 1 October 2026. The split by category is uneven:

Index funds tell the same story. All 24 Nifty 50 index funds with a full year of history were down, most by close to 8.9%; the UTI Nifty 50 Index Fund went from a NAV of 173.32 on 1 October 2025 to 157.89 on 1 October 2026.

A negative one-year return does not mean every investor in the fund is sitting on a loss. Someone who started a SIP in 2021 is probably still well ahead overall. But their most recent instalments, and any lump sum added in the past year, may well be under water, and those are the units that can be harvested.

The rules the whole exercise rests on

Rates. Gains on equity-oriented funds and listed shares are short-term if held up to 12 months and taxed at 20%. Held longer, they are long-term and taxed at 12.5% on the amount above ₹1.25 lakh a year. Debt-fund gains on units bought after 1 April 2023 are taxed at your slab rate however long you hold them. How mutual funds are taxed covers the third group: gold, international and fund-of-funds schemes.

Set-off order. A short-term capital loss can absorb short-term or long-term gains. A long-term loss can absorb only long-term gains. Capital losses never reduce salary or interest income.

No wash-sale rule. You can redeem a fund to book the loss and buy the same fund back the same week. The loss still counts.

Carry-forward. Losses you cannot use this year carry forward for eight years, provided the return for the loss year is filed on time.

A worked example

Say you put ₹5 lakh into a Nifty 50 index fund in the past year and it has fallen 8.9% to about ₹4.55 lakh, a loss of ₹44,500. Separately, you sold a small-cap fund held for eight months at a short-term gain of ₹1.5 lakh.

That is ₹9,256 of tax saved, and if you buy the index fund back you hold the same position you had before. The tax-loss harvesting calculator does this set-off across several holdings at once.

Two details change the answer. First, units are redeemed oldest first, so selling part of a SIP holding redeems the earliest instalments, which may be gains rather than losses. Redeem enough to reach the loss-making lots, or check the lot-wise statement your registrar provides. Second, if the losing units have crossed 12 months, the loss is long-term and can only be set against long-term gains.

The mirror move: harvest a gain

The ₹1.25 lakh long-term exemption resets every financial year and cannot be carried forward. If you hold long-term equity gains and have not used this year's allowance, you can sell enough to realise about ₹1.25 lakh of gain, pay no tax on it, and buy back the same fund. Your cost base goes up and the gain you will eventually be taxed on goes down. Over a decade of doing this each March, that can shelter several lakh of gains.

Where it goes wrong

• Exit loads. Many equity funds charge 1% if redeemed within a year. On a small loss, the load can cost more than the tax you save. Check the scheme's exit load before you sell.
• Stamp duty and time out of the market. Buying back costs 0.005% stamp duty, and the money is uninvested between redemption and allotment. In a sharp rally, a few days out can cost more than the tax saved.
• ELSS is different. Units bought in the past three years are locked in and cannot be redeemed, so the loss-making ELSS units from 2025–26 cannot be harvested yet.
• Tax deciding the portfolio. Harvesting should ride along with a decision you were going to make anyway, such as rebalancing or consolidating funds. Selling a fund you meant to keep, or keeping one you meant to sell, because of tax gets the order wrong.
• Missing the deadline. A carried-forward loss is lost entirely if the return is late.

When to do it

The tidy time is March, when you know the year's realised gains. If you redeemed funds in April–September and expect more sales, the losses can be booked now and kept until 31 March. The capital gains calculator and our companion post on capital gains tax on stocks and property cover the rates in more detail.

This is educational commentary, not tax or investment advice; fund figures are computed from daily NAVs to 1 October 2026, tax rules change with each Budget, and past returns do not predict future returns.