- Long-term losses offset only long-term gains; short-term losses offset both.
At the end of each financial year in March, investors rush to sort out their portfolios, book profits and review their mutual fund investments. Tax-loss harvesting is an underrated strategy that many investors do not know about, but it can legally reduce your capital gains tax burden before the financial year ends.
What Is Tax-Loss Harvesting?
Tax-loss harvesting is when you intentionally sell investments that are in the red to cancel out profits you made elsewhere. You sell the loss-making investment before the financial year ends to reduce your taxable profits.
For example, imagine you earned a profit of Rs 1 lakh by selling one stock. At the same time, another stock in your portfolio is down by Rs 40,000. If you sell that loss-making stock too, your taxable capital gain becomes Rs 60,000 instead of Rs 1 lakh.
This does not mean you are getting rid of good investments. It simply reduces your tax burden by using existing losses to offset profits that would otherwise be taxed. Many investors do this near the end of March because capital gains tax is calculated for the financial year ending on March 31.
Is Tax-Loss Harvesting Legal In India?
It is entirely legal under Indian tax law for salaried investors to use tax-loss harvesting. You can use it if you invest in stocks or mutual funds and have to pay capital gains tax.
The Income Tax Act allows you to offset capital losses against capital gains. If your total losses are higher than your gains in a financial year, the unused losses are not wasted. They can be carried forward for up to eight years and used later to reduce future capital gains tax.
Long-Term vs Short-Term Capital Losses: What You Can Set Off
There is one important rule to keep in mind. Long-term capital losses can only be adjusted against long-term capital gains. They cannot reduce short-term gains. Short-term capital losses are more flexible and can be used to reduce both short-term and long-term capital gains. Getting this wrong could mean losing the benefit entirely.
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Why March 31 Is The Deadline For Tax-Loss Harvesting
March matters because the financial year in India ends on March 31. Capital gains tax is calculated based on what you buy and sell before this date. So if you want to use losses in your portfolio to reduce your tax, you need to sell those loss-making investments before March 31.
If you wait until April, the sale will count in the next financial year. That means you cannot use that loss to reduce the current year’s tax bill. This is why many investors review their portfolios in March and decide whether selling some underperforming investments can help lower their taxes legally.
Does Tax-Loss Harvesting Mean Panic-Selling?
Tax-loss harvesting does not mean you should panic-sell every investment that is in the red. You need to identify assets that are genuinely underperforming and use those losses to reduce your tax burden. Selling such investments also enables you to move that money into better-performing assets, which improves the overall quality of your portfolio.
The strategy itself is simple. The rules are clearly defined under tax law, and for investors with larger portfolios, the tax savings can be significant.
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