Tax-Loss Harvesting in India: How to Set Off and Carry Forward Capital Losses on Shares and Mutual Funds
- November 13, 2026
- Posted by: Kunal Singla
- Category: Market
Equity STCG 20%. LTCG 12.5% above Rs 1.25 lakh. Short-term loss offsets both gains, long-term loss offsets only long-term gains. Unused losses carry forward 8 years if the ITR is filed on time.
Quick Answer
Tax-loss harvesting in India means selling investments at a loss to offset taxable capital gains. A short-term capital loss can be set off against both short-term and long-term gains, while a long-term capital loss can be set off only against long-term gains. Unused losses can be carried forward for eight years, but only if you file your return by the due date.
Tax-loss harvesting in India is a legal way to lower your capital gains tax by using the losses sitting in your portfolio. If you have booked gains this year, a planned sale of a losing holding can reduce what you owe.
This guide explains the set-off and carry forward rules, shows a worked example and lists the mistakes that can make the exercise less effective than it looks.
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What Is Tax-Loss Harvesting in India?
Tax-loss harvesting means selling an investment that is trading below your purchase cost, so that the loss can be used against gains made elsewhere. The loss reduces your taxable capital gains for the financial year. Many investors review their portfolios before 31 March to see where this is possible.
Capital Gains Tax Rates to Keep in Mind
For listed equity shares and equity mutual funds in FY 2026-27, short-term capital gains, on assets held for up to 12 months, are taxed at 20%. Long-term capital gains, on assets held for more than 12 months, are taxed at 12.5% on the amount above Rs 1.25 lakh in a year. The Budget 2026 did not change these rates.
If you are new to tax-loss harvesting, first learn your realised gains, because tax harvesting has no value without gains to offset. The benefit of tax harvesting is the tax you save, so tax-loss harvesting makes sense mainly in years when you have booked gains.
Set-Off Rules for Capital Losses
| Type of loss | Can be set off against | Cannot be set off against |
|---|---|---|
| Short-term capital loss | Short-term capital gains and long-term capital gains | Salary, business or other income |
| Long-term capital loss | Long-term capital gains only | Short-term capital gains and other income |
Losses are first set off in the same financial year. If any loss remains, it can be carried forward and set off against future capital gains of the allowed type.
Carry Forward of Capital Losses
Unabsorbed capital losses can be carried forward for up to eight financial years. To claim this benefit, you must file your income tax return by the due date for the year in which the loss occurred. Filing late can cost you the right to carry the loss forward. Due dates change by notification, so check the current one for your category.
A Simple Worked Example
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Suppose you have booked a long-term gain of Rs 2,00,000 on one stock this year. After the Rs 1.25 lakh exemption, the taxable gain is Rs 75,000. You also hold another stock at a long-term loss of Rs 60,000. If you sell it, the loss reduces the gain to Rs 15,000 above the exemption base, and you pay 12.5% only on the lower amount.
A short-term loss of Rs 40,000 from a trade can be set off against that long-term gain as well, because short-term losses are flexible. A long-term loss cannot be set off against short-term gains.
Steps to Harvest Losses
- List your realised gains for the year from your broker’s tax report.
- Identify holdings with unrealised losses that you are ready to sell.
- Check the holding period to know whether the loss will be short-term or long-term.
- Sell the holding before the financial year ends.
- Record the loss in your return and file on time to carry forward any balance.
Tax-loss harvesting works best when it is a yearly habit and not a last-week rush. Many investors schedule tax-loss harvesting in February or March, after reviewing the year’s realised gains. Tax loss harvesting is also easier when you keep a running list of holdings below cost, so harvesting losses becomes a quick decision rather than a research project. Loss harvesting should never push you out of a good business just to save tax.
Wash Sale Caution
Some investors sell a losing stock and buy it back immediately to keep the position. India has no explicit wash sale rule for shares like some countries do, but tax authorities can question transactions that lack commercial substance. Think about whether you truly want to exit, and avoid trades done only for tax.
Remember also that selling costs money. Brokerage, STT and other charges reduce the benefit, so harvest only when the tax saved is meaningful. Rebalancing a large position in the Nifty 50 constituents or a fund can be a natural time to do it.
Mutual Funds and Other Assets
The same ideas apply to equity mutual fund units. Losses on other asset types follow their own rules, so check the treatment of debt funds, gold and property separately.
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Conclusion
Tax-loss harvesting in India uses losses to reduce capital gains tax. Short-term losses offset both gain types, long-term losses offset only long-term gains, and leftover losses carry forward for eight years if you file on time.
Plan before the financial year ends, count the costs of selling and keep clear records for your return.
Disclaimer: Data and figures in this article are sourced from publicly available information. These may or may not be accurate. Please verify all data with the official NSE (nseindia.com) and BSE (bseindia.com) websites before making any investment decision. Investments in securities are subject to market risk. This content is for educational purposes only and is not investment advice by Univest (SEBI RA INH000013776).
Frequently Asked Questions
What is tax-loss harvesting?
Ans. It is the practice of selling investments at a loss so that the loss can offset taxable capital gains in the same year or in later years, which lowers the tax you pay.
Can a long-term capital loss be set off against short-term gains?
Ans. No. A long-term capital loss can be set off only against long-term capital gains. A short-term capital loss, however, can be set off against both short-term and long-term gains.
How long can capital losses be carried forward?
Ans. Capital losses can be carried forward for up to eight financial years after the year in which they occurred, provided the return for that year was filed on or before the due date.
Can capital losses be set off against salary income?
Ans. No. Capital losses can be set off only against capital gains of the allowed type. They cannot reduce salary or business income.
Do I need to file an ITR to carry forward a loss?
Ans. Yes. You must file your return on time and report the loss. If you miss the due date for that year, you may lose the right to carry the loss forward.
Is buying back the same stock after selling it allowed?
Ans. There is no specific wash sale rule for shares in India, but transactions without commercial substance can be questioned. Consider whether you really want to exit before selling for tax purposes only.
Does tax-loss harvesting apply to mutual funds?
Ans. Yes, for equity mutual funds, losses on selling units follow the same short-term and long-term rules. Other fund types may have different treatment, so check the current rules.
