Tax harvesting is a smart strategy that investors use to minimise tax liabilities by offsetting capital gains with capital losses. This approach is widely practiced in the US and can be leveraged by Indian investors as well.

What is tax harvesting?

Tax harvesting involves selling investments at a loss to offset taxable gains in the same financial year.

If a portfolio holds stocks or mutual funds in a loss position towards the end of the financial year, selling them before March 31, 2025, can create capital losses that help reduce tax liability.

Karan Aggarwal, Co-Founder & CIO, Elever, explains: “In the US, it’s common for investors to book investment losses near the end of the financial year to reduce their tax liabilities and create tax assets. This strategy, known as tax loss harvesting, can also be leveraged by Indian investors to generate tax alpha.”

How does tax harvesting work?

• Sell underperforming stocks or funds to realise a capital loss.
• Use this loss to offset capital gains from other investments, including equity or real estate gains.
• If there are no gains to offset, carry forward the losses for up to 8 years to offset future capital gains.
• Buy a similar asset immediately or repurchase the same asset after two days to maintain market exposure.

Key considerations

Losses cannot be offset against salary income but can be used to adjust against gains from equity, real estate, or other capital assets.

Derivative gains cannot be offset using carried-forward losses.

Investors should rebalance their portfolios carefully to avoid missing potential market rebounds.

For mutual funds and ETFs, tax harvesting is simple—sell a fund and buy another in the same category. Stock investors can either buy shares of a competitor in the same industry or wait two days before repurchasing the same stock.