Tax Loss Harvesting in India: Using Losses Before March 31

Every year around February, someone in a WhatsApp investing group asks the same question: “I’m sitting on a loss in this stock, should I sell it before March 31 to save tax?” That idea has a name, tax loss harvesting, and in India it works because of a fairly simple set of rules about how capital losses can be set off against capital gains. Done well, it cuts the tax on gains you’ve already booked. Done carelessly, it can waste a loss or reset a holding you never meant to touch.

This guide explains how tax loss harvesting in India works under the Income-tax Act, 2025, which is the law that applies to sales made from April 1, 2026. We’ll go through the rate structure, the set-off rules, carry forward, the twelve-month line that changes everything, and four worked examples with hypothetical numbers so you can see the arithmetic.

What tax loss harvesting means in India

The idea is plain. During a tax year you may have booked profits on some shares. You also hold other shares that are below your purchase price. Until you sell those losers, the loss exists only on your screen. Sell them before the year ends and the loss becomes real for tax purposes, and the law lets you subtract it from the gains you’ve already booked. Lower net gain, lower tax.

Two things make the timing matter. First, the new Act defines a tax year as the twelve-month financial year starting on April 1. So a loss booked on March 30 sits in the same year as a profit booked the previous May, while a loss booked on April 2 falls into the next year. Second, the type of loss (short-term or long-term) decides what it can be set off against, and that depends on how long you held the share.

One scope note before we start. Everything below is about shares and equity funds you hold on delivery and that are taxed under the head “Capital gains”. If your trading income is assessed under a different head, the rules for those losses are different, and you should check with your tax adviser.

The rates you are trying to reduce

For listed equity shares and units of equity-oriented funds where securities transaction tax (STT) applies, the Income-tax Act, 2025 sets two special rates:

• Short-term capital gains: Section 196 taxes them at 20%.
• Long-term capital gains: Section 198 taxes the portion of such gains exceeding ₹1,25,000 at 12.5%.

Whether a gain is short-term or long-term comes from the definition of a short-term capital asset in Section 2. For a security listed on a recognised stock exchange in India, or a unit of an equity-oriented fund, the asset is short-term if you held it for not more than twelve months before the sale. Hold it longer and it becomes long-term.

Keep those three numbers in mind: 20%, 12.5% and ₹1,25,000. Every harvesting decision is really a question about which of them a loss will reduce.

The set-off rules, in plain words

Section 108(2) covers losses within the same tax year:

• A short-term capital loss can be set off against income from any other capital asset. That means short-term gains or long-term gains.
• A long-term capital loss can be set off only against income from another long-term capital asset.

The Income Tax Department’s own guide on set-off and carry forward of losses says the same thing in simpler words, and adds an important restriction: a loss under the head “Capital gains” cannot be set off against income under any other head. So a stock market loss will not reduce the tax on your salary, rent or business income. It only works against capital gains.

That asymmetry is the heart of the strategy. A short-term loss is the flexible one. A long-term loss is narrow and can only touch long-term gains.

A short-term loss can go anywhere inside the capital gains head. A long-term loss can only go to long-term gains. Most harvesting mistakes come from forgetting which one you’re holding.

Carry forward: what happens to a loss you can’t use this year

Sometimes your losses are bigger than your gains, or you had no gains at all. The loss isn’t wasted. Under Section 111, unabsorbed capital losses are carried forward to later tax years, with the same restrictions. A carried-forward short-term loss can be set off against any capital gain in a later year, while a carried-forward long-term loss can only be set off against long-term gains. And there’s a limit: no loss can be carried forward for more than eight tax years after the year in which it was first computed.

There is one condition people miss. Section 121 says a loss can be carried forward under Section 111 only if it has been determined in a return filed under Section 263(1). The Department’s guide, written for the old law, puts the practical point bluntly: the return for the year of the loss has to be filed on or before the due date. Skip filing because “I had a loss, there’s no tax anyway”, and you may lose the right to carry that loss forward.

Worked example 1: a short-term loss against short-term gains

All the people and numbers in these examples are hypothetical. We’ll ignore surcharge, cess and transaction costs to keep the arithmetic clean.

Meera booked a short-term gain of ₹1,50,000 in tax year 2026-27 by selling Stock A five months after buying it. She also holds Stock B, bought eight months ago for ₹2,00,000 and now worth ₹1,40,000. That’s an unrealised loss of ₹60,000.

• If she does nothing: short-term gain ₹1,50,000 × 20% = ₹30,000 tax.
• If she sells Stock B before March 31, 2027: net short-term gain ₹1,50,000 − ₹60,000 = ₹90,000. Tax at 20% = ₹18,000.
• Tax saved: ₹12,000.

Note what she gave up. She no longer owns Stock B. If she still likes the business, she has a decision to make about buying it back, which we come to below.

Worked example 2: long-term gains and the ₹1.25 lakh threshold

Arjun has booked a long-term gain of ₹2,50,000 this tax year on shares held for three years. He also holds another long-term position sitting on a loss of ₹80,000.

• Without harvesting: taxable portion ₹2,50,000 − ₹1,25,000 = ₹1,25,000. Tax at 12.5% = ₹15,625.
• With harvesting: net long-term gain ₹2,50,000 − ₹80,000 = ₹1,70,000. Taxable portion ₹1,70,000 − ₹1,25,000 = ₹45,000. Tax at 12.5% = ₹5,625.
• Tax saved: ₹10,000.

Now flip it. Suppose Arjun’s long-term gain this year was only ₹1,00,000. It’s already below ₹1,25,000, so there’s no long-term tax to save. Booking the ₹80,000 long-term loss against it achieves nothing this year. Because the law says a loss is set off against gains in the same year first, and only the unabsorbed part is carried forward, he may simply be using up a loss that could have been more useful later. Before harvesting a long-term loss, check whether your long-term gains even cross the threshold.

Worked example 3: carrying a loss into the next year

Kavya had a bad 2026-27. She booked a short-term loss of ₹1,00,000 and no gains. She files her return on time, so the loss is determined and carried forward.

In 2027-28 she books a long-term gain of ₹3,00,000. Since a carried-forward short-term loss can be set off against any capital gain, it can reduce this long-term gain.

• Without the carried-forward loss: taxable portion ₹3,00,000 − ₹1,25,000 = ₹1,75,000. Tax at 12.5% = ₹21,875.
• With it: net long-term gain ₹2,00,000. Taxable portion ₹75,000. Tax at 12.5% = ₹9,375.
• Tax saved: ₹12,500, thanks to a loss booked a year earlier and a return filed on time.

Worked example 4: the twelve-month line

This is where tax loss harvesting in India gets interesting. Rohan bought shares of Stock C on November 1, 2025, and they are now ₹40,000 below his cost. As long as he sells within twelve months of buying, the loss is short-term. It can then be set off against short-term gains taxed at 20%, or against long-term gains.

If he waits past the twelve-month mark and then sells, the same ₹40,000 becomes a long-term loss. Now it can only be set off against long-term gains, and only the portion of those gains above ₹1,25,000 is actually taxed. Same stock, same rupee loss, very different usefulness.

The lesson: when you’re reviewing losers for harvesting, check the purchase date before the price. A loss that’s about to cross from short-term to long-term is often worth deciding on sooner rather than at the March year-end rush.

Buying back after you sell

Most people who harvest a loss still like the company. So the natural question is whether they can sell, book the loss, and buy the same shares again.

Mechanically, here’s what a buyback does. Your new cost becomes the new purchase price, which is lower, so any future gain on that holding will be larger. And because the short-term definition counts the period you held the asset before the sale, the twelve-month clock starts again from the new purchase date. You’ve converted a paper loss into a real one now, in exchange for a bigger taxable gain later. That’s usually still worth it when you have gains to offset today, but it is a deferral, not free money.

The sections we’ve quoted describe how losses are set off and carried forward; they don’t spell out a waiting period before you rebuy. If you plan to sell and rebuy the same stock on the same day in large amounts, talk to a chartered accountant first about how that might be viewed.

Harvesting doesn’t erase tax. It moves it. The win comes from paying less today, at a lower rate, or never paying it if gains later stay under the exemption.

The flip side: harvesting gains under ₹1.25 lakh

The same logic runs in reverse for long-term gains. Since Section 198 taxes only long-term gains exceeding ₹1,25,000, some investors book long-term profits up to that level in a tax year and then buy back. The gain is booked within the threshold, and the cost of the new holding resets higher, which reduces the taxable gain on a future sale.

Say Neha has an unrealised long-term gain of ₹1,00,000 on a fund and no other long-term gains this year. Selling and rebuying books a gain that sits below ₹1,25,000, so no long-term tax arises under Section 198, and her new, higher cost base carries forward. If she already has other long-term gains this year, the arithmetic changes, so she’d add them up first.

A practical checklist before March 31

1. List realised gains for the tax year, split into short-term and long-term. Your broker’s tax P&L report is the easiest starting point.
2. List unrealised losses, each tagged with its purchase date so you know which side of the twelve-month line it sits on.
3. Match short-term losses first to the gains they’re most useful against, and check whether long-term gains even cross ₹1,25,000 before using long-term losses.
4. Decide on each stock as an investment first. Selling a business you’d otherwise keep only for a small tax saving is a poor trade.
5. Don’t leave it to the final session. If March 31 falls on a weekend or holiday, the last trading day of the tax year comes earlier.
6. File your return on time so any unused loss can be carried forward for up to eight tax years.

Where this fits in your process

Tax loss harvesting is a year-end clean-up, not a trading strategy on its own. It works best alongside a clear exit plan. If you already cut losing positions using rules like the ones in our guide to risk management in trading, harvesting just adds a calendar check on top. If your habit is to keep adding to falling stocks, read our piece on averaging down stocks first, because harvesting a loss and averaging down on the same position pull in opposite directions. And if you trade IPO listings, our explainer on listing gains tax in India covers how short-term gains from listing day are taxed.

Bottom line

Tax loss harvesting in India comes down to a few rules: short-term losses can offset any capital gain, long-term losses only long-term gains, capital losses can’t touch other income, and unused losses carry forward for up to eight tax years if you file on time. Get the twelve-month line and the ₹1,25,000 threshold right, and a loss you’d otherwise just stare at can do some useful work.

Disclaimer: This article is for education only and is not investment or tax advice. All people, stocks and figures in the worked examples are hypothetical, and surcharge, cess and transaction costs have been ignored for simplicity. Tax rules can change and individual situations differ; please consult a chartered accountant or a SEBI-registered adviser before acting.