Question 1

What is tax loss harvesting and how does it work in India?

Accepted Answer

Tax loss harvesting is the strategy of selling investments at a loss to offset capital gains, thereby reducing your tax liability. In India, you can offset LTCG losses against LTCG gains, and STCG losses against both STCG and LTCG gains. For example, if you have Rs 2 lakh LTCG and Rs 1 lakh unrealized losses, selling the loss-making stocks reduces your taxable LTCG to Rs 1 lakh. Unlike the US, India has no 'wash sale rule', so you can immediately repurchase the same stock after booking the loss.

Question 2

What is the LTCG exemption limit and how can I maximize it?

Accepted Answer

The LTCG exemption is Rs 1.25 lakh per financial year (increased from Rs 1 lakh in Budget 2024). This means your first Rs 1.25 lakh of long-term capital gains on equity and equity mutual funds is tax-free. To maximize this: (1) Book profits up to Rs 1.25 lakh each year before March 31, (2) This exemption does NOT carry forward, so use it or lose it, (3) Consider rebalancing your portfolio annually to utilize this limit. This strategy alone can save you Rs 15,625 in taxes each year (12.5% of Rs 1.25 lakh).

Question 3

What is the deadline for tax loss harvesting and can I carry forward losses?

Accepted Answer

Tax loss harvesting must be completed before March 31 to offset gains in the current financial year. If your losses exceed gains, you can carry forward the excess capital loss for up to 8 assessment years. Important: To carry forward losses, you MUST file ITR before the due date (July 31). Losses from current year can be set off without filing requirement, but carried forward losses require timely filing. Also note: LTCG losses can only offset LTCG gains, while STCG losses can offset both.

Question 4

How does the FIFO rule affect tax loss harvesting?

Accepted Answer

FIFO (First-In-First-Out) rule means when you sell shares, the oldest purchases are considered sold first. This matters for determining whether gains are short-term or long-term. For example, if you bought 100 shares in 2020, 100 in 2021, and 100 in 2024, selling 150 shares will first dispose of all 2020 shares (LTCG) and 50 from 2021 (LTCG). Plan your sales considering FIFO to optimize between STCG (20% tax) and LTCG (12.5% tax above Rs 1.25 lakh exemption).

Question 5

Should I harvest losses even if I believe the stock will recover?

Accepted Answer

Yes, in most cases! Since India has no wash sale rule, you can immediately rebuy the same stock after booking the loss. This locks in the tax benefit while maintaining your position. The only costs are: (1) Transaction charges (minimal), (2) Brief price movement risk during rebuy. Best practice: Execute sell and buy orders simultaneously or within same trading session to minimize timing risk. This strategy is particularly valuable before March 31 when you have gains to offset.

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