What is Tax Loss Harvesting in India?

Tax loss harvesting is the practice of selling an investment at a loss to realise the “capital loss” and use it to reduce taxable capital gains, subject to applicable tax rules. As per the provisions of the Income Tax Act, 1961, short-term capital losses can be set off against both STCG and LTCG, while long-term capital losses can be set off only against LTCG. 

Additionally, unused eligible capital losses may also be carried forward for up to 8 assessment years, subject to conditions.

How to Do Tax Loss Harvesting in India?

Let’s understand better through an example:

• Suppose an investor earns a profit of ₹2 lakh in LTCG from Stock A.
• However, they incur a ₹80,000 loss on Stock B. 
• Now, the investor sells Stock B and books the “capital loss”.

This ₹80,000 loss can be set off against eligible LTCG, which reduces the taxable gain to ₹1.20 lakh, subject to the applicable rules.

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