Tax-loss harvesting is the deliberate booking of a loss you are already carrying, so that it cancels a gain you would otherwise be taxed on. In India it is unusually clean, for one reason most investors do not know: there is no wash-sale rule. You may sell a fund to realise the loss and buy it back immediately, and the loss still counts.
The rules that make it work
Set-off has a hierarchy. A short-term capital loss may be set off against either short-term or long-term gains. A long-term capital loss may only be set off against long-term gains. That asymmetry means a short-term loss is the more flexible asset, and it should generally be spent against the higher-taxed gain.
Unused losses carry forward eight years — but only if you file your return by the due date. Miss the deadline and the carry-forward is simply lost. This is the single most expensive filing detail in Indian personal finance and it costs people real money every year.
Capital losses cannot be set off against salary or other income. They live in their own box.
The rates the whole exercise is played against, from mutual fund taxation: equity-oriented gains are short-term at 20% under twelve months and long-term at 12.5% beyond it, above a ₹1,25,000 annual exemption. Debt-style holdings are taxed at your slab.
The two moves, and when each applies
Harvesting a loss. You hold a fund at a loss and have realised gains elsewhere this year. Sell the loser, book the loss, set it against the gain, and — because there is no wash-sale rule — buy the same fund back if you still want the exposure. The tax-loss harvesting calculator does the set-off arithmetic across your holdings.
Harvesting a gain, which is the move almost nobody makes. The ₹1,25,000 long-term equity exemption is annual and does not carry forward. If you have long-term gains sitting unrealised and have not used this year's exemption, selling enough to realise about ₹1,25,000 of gain and immediately rebuying costs nothing in tax and resets your cost base upward — permanently reducing the gain you will eventually pay on. An allowance you do not use is simply gone, and this is the same lever running in the opposite direction. It belongs in the annual portfolio audit and in the decumulation order.
Doing it without wrecking the portfolio
Three cautions, in order of how often they bite:
Do not let tax drive the allocation. Selling a fund you should keep, or holding one you should sell, to manufacture a tax outcome is the tail wagging the dog. The right time to act on this is while you are already rebalancing or cleaning up a messy portfolio — decide the portfolio first, then take the tax benefit the decision happens to allow.
Count the round-trip costs. Exit load, stamp duty on the repurchase, and the days out of the market while the redemption settles are all real. On a small loss they can exceed the tax saved.
Watch the holding-period clock. Buying back restarts it, so a repurchased holding is short-term again for the next twelve months. That can be exactly what you want — short-term losses are more flexible — or exactly what you do not, if you were close to long-term treatment.
Timing: this is a March exercise, done with the year's realised gains actually known, not a December guess.
⚠️ Rates, the ₹1,25,000 exemption, the carry-forward period and the filing-deadline condition are statutory and change with the Budget. The absence of a wash-sale rule is current law, not a permanent feature. Verify before acting — WealthTicker is not a SEBI-registered investment adviser and this is not tax advice.
Key takeaway
India has no wash-sale rule, so you can book a loss and rebuy the same fund immediately and still claim it. Short-term losses set off against anything; long-term losses only against long-term gains; unused losses carry forward eight years only if you file on time. And run the mirror move too — realise enough long-term gain each year to use the ₹1,25,000 exemption, because it does not carry forward and resetting your cost base with it is free. Decide the portfolio first; take the tax benefit second.
More in Module 4 — Portfolio management and strategy
The art of asset allocation: it decides more than fund selection ever will
How much sits in equity matters more than which equity fund. Setting the split, rebalancing on bands rather than hunches, and doing it without handing back the gain in tax.
Goal-based investing: mapping dreams to specific buckets
A goal is an amount, a date and a priority — and the date alone decides most of the allocation. Why separate buckets work, and the glide path that stops a goal arriving mid-drawdown.
Core and satellite: how to build a portfolio you can actually maintain
Every holding is either reliable or interesting, most of the money is in the reliable part, and the interesting part has a size limit set in advance.
STP: how to deploy a lump sum without betting on one date
The waiting money earns debt-fund returns instead of sitting in savings. What an STP actually buys — regret protection, not extra return — and why each instalment is taxable.
SWP: creating your own monthly pension
Why a withdrawal plan beats an IDCW payout on tax and on control, how each instalment is taxed, and the sequence risk that decides whether the money lasts.
Portfolio rebalancing: when and why you must sell winning assets
Drift is a risk decision you never made. Bands over hunches, the execution ladder that starts with new money rather than a sale, and why the discomfort is the mechanism.
Handling underperformance: when to stay and when to exit
Separating what changed about the fund from what changed about the market: mandate drift, manager exits, and the review habit that stops you acting on a bad quarter.
Fund manager changes: should you panic when the captain leaves?
Were you buying a person or a process? What to check immediately, what to watch for six to twelve months, and the one situation where moving quickly is free.
Mutual fund overlap: are you really diversified?
Diversification stops early and overlap starts immediately. Why the answer is four to six, how to measure the duplication you already own, and how to unwind it without a tax bill.
How to clean up a portfolio with too many schemes
Four moves in strict order: see everything, label every holding, stop the inflows, then unwind slowly across financial years using the annual exemption.