Tax Loss Harvesting — Complete Breakdown
Sell loss-making investments before March 31 to create an 8-year tax shield against future profits
What is This Hack?
Sell loss-making equity investments before March 31 to officially book the loss. Use it to offset gains this year — or carry it forward for up to 8 years. Buy back immediately. Your investment stays intact, but you now have a tax shield on record.
How It Works
When you sell a mutual fund or stock that is currently at a loss, that loss gets officially recorded with the government. You can then use this loss to reduce your taxable profits — either this year or in any of the next 8 financial years. Your investment doesn't actually go anywhere. You sell, buy back immediately, and the only thing that changed is that you now have a loss on record. Short-term losses can offset both short-term AND long-term gains. Long-term losses can only offset long-term gains. Market downturns are essentially a free 8-year tax shield sitting in your portfolio.
₹20,000 Loss Saves ₹4,000+ in Tax
Situation
Without This Hack
With This Hack
💰 ₹10,000 - ₹6,000 = ₹4,000 saved. With larger portfolios, this easily scales to ₹50K–2L+ in savings. And if you have no gains this year, the ₹20,000 loss carries forward for 8 years.
Common Pitfalls to Avoid
- Solution: Always file ITR with capital losses declared, even if you have no tax liability. Use the capital gains section and ensure carry-forward is selected.
- Solution: Track holding period carefully. Equity <12 months = STCG. Equity >12 months = LTCG. Debt <36 months = STCG. Debt >36 months = LTCG.
- Solution: Focus on non-locked investments: regular equity MFs, debt MFs, listed stocks, and ETFs.
- Solution: Sell by March 28–29 to ensure settlement within the current financial year.
Prerequisites & Requirements
- Demat/MF account with loss-making holdings
You need investments currently showing unrealized losses — mutual funds, stocks, or ETFs.
- File ITR with capital gains section
Loss must be declared in your Income Tax Return. Without filing, the loss does not carry forward.
- Complete before March 31
The financial year closes on March 31. Sell by March 28–29 to allow for settlement time.
Key Benefits
- Potential savings: ₹20,000–2+ lakhs
- Implementation time: 10 minutes before March 31
- Legal status: fully legal
- Risk level: low
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Step-by-Step Guide
Open your portfolio and identify red positions
Log into your demat/MF account. Look for mutual funds, stocks, or ETFs that are currently showing a loss (negative returns). Note which are short-term (<1 year for equity, <3 years for debt) and which are long-term.
Sell loss-making holdings today
Place sell orders for the identified loss-making investments. The loss is officially booked only when you sell. For mutual funds, place a redemption request. For stocks, place a market sell order.
Buy back within 1–2 days
Once the sale settles, buy back the same fund or a similar one. Your investment stays intact — same amount, same allocation. India has no wash sale rule like the US, so buying back the exact same fund is perfectly legal.
Record the loss when filing ITR
This is the step most people skip. You MUST declare the capital loss in your Income Tax Return under the capital gains section. If you don't file it, the loss does not carry forward — it simply vanishes. Your CA or tax software will handle the offset calculation.