Invested in equities and want to cut your income tax? Use tax loss and gain harvesting before March 31, 2026

If some of the equity shares and equity oriented mutual funds in your portfolio are losing value while others are gaining, you can save on income tax for AY 2026-27 by using a strategy known as tax loss harvesting. This involves selling your your listed equity shares and equity mutual funds that are at a loss to offset the capital gains from your other profitable investments, which helps lower your overall tax liability.

However, if all equity mutual funds and listed equity shares in your portfolio are in the red, then the tax-loss harvesting method won’t help you save on taxes for AY 2026-27. In that case, you’ll need to use carry-forward and set-off provision to book this loss by selling the loss-making equity mutual funds and equity shares by March 31st and carry it forward for future tax offsets. (We’ll go into more detail about this later).

There is no bar that you have to do this tax loss harvesting only on March 31, 2026; you can do it any time throughout the year as part of your regular portfolio management to keep your tax situation optimal. However, it's advisable to consult your financial advisor before selling any equity mutual funds or shares from your portfolio.

What is the tax loss and tax gain harvesting method and how much tax can you save under each of the methods?

When it comes to tax gains harvesting, you can save up to Rs 15,625 in taxes since LTCG up to Rs 1.25 lakh is exempt from taxation and LTCG rate is 12.5%. So, Rs 1.25 lakh*12.5%-= Rs 15,625. Plus, with tax gains harvesting method, your acquisition cost can go up, lowering your future tax bill whenever you sell the asset.

On the flip side, for the tax-loss harvesting method, there is no upper limit, as you are essentially using set-off provisions to offset your gains with losses.

Chartered Accountant Suresh Surana explains: Tax loss harvesting refers to the practice of reviewing the portfolio and selling identified investments that are currently at a loss in order to offset capital gains realised during the financial year. Investors may sell shares to realise losses and then repurchase them or other stocks, as they may prefer. By doing so, investors can reduce their overall tax liability since capital losses can be set off against capital gains under the provisions of the Income-Tax Act, 1961.

Suppose an investor has the following investments:

Investments in shares	Gain/(Loss)
Stock A	50,000
Stock B	(20,000)

Particulars	Without Tax Loss Harvesting (in Rs)	With Tax Loss Harvesting (in Rs)
Short-Term Capital Gain on Stock A	50,000	50,000
Short-Term Capital Loss on Stock B	–	(20,000)
Net Taxable Short Term Capital Gains	50,000	30,000
Tax Rate (STCG)	20%	20%
Tax Liability	10,000	6,000
Tax Saved	–	4,000

LTCG gain harvesting

It refers to the practice of booking long-term capital gains within the tax-exempt threshold to optimise tax efficiency. Under Section 112A of the Act, long-term capital gains on listed equity shares and equity-oriented mutual funds are exempt up to Rs 1.25 lakh in a financial year. Investors may sell shares to realise gains up to this limit and then repurchase them or other shares. This resets the acquisition cost at a higher level, thereby reducing the potential tax liability on future gains.

Particulars	Scenario without LTCG Harvesting	Scenario with LTCG Harvesting
Purchase Price of Shares	Rs 2,00,000	Rs 2,00,000
Current Market Value	-	Rs 3,25,000
Long-Term Capital Gain (LTCG)	-	Rs 1,25,000
Taxability of Gain	Since the shares have not been sold. Hence, no tax liability arises.	LTCG realised and exempt as it is within Rs 1.25 lakh limit
Action Taken	Investor continues to hold the shares	Investor sells the shares and immediately repurchases them
New Cost of Acquisition	-	Rs 3,25,000
Benefit	No immediate benefit for the shareholder, future gains will be calculated taking cost of acquisition as Rs 2,00,000	Future gains will be calculated from Rs 3,25,000, reducing potential taxable Capital Gains

Will tax loss or tax gain harvesting work if an individual uses two demat accounts (same PAN)?

If you have say two demat accounts in your own name (same PAN), you may sell the listed equity shares via one demat account and simultaneously buy the same shares via another demat account. The question is will this transaction be considered as intraday (speculative) or long term?

Surana says that each broker recognises only the transactions executed on its own platform.

Therefore, Broker X would record a delivery-based sale (assuming the shares are held as investments), while Broker Y would reflect a separate delivery-based purchase. Thus Surana says that since there is no corresponding buy and sell within the same account, the transactions are not netted off and would not be classified as intraday (speculative) trades.

Surana says: “Instead, these transactions retain their character as delivery-based transactions, and the resulting gains or losses would be assessed as short-term or long-term capital gains, depending on the holding period of the shares sold.”

Conversely, if both of the transactions are executed within a single demat account, the broker may classify it as an intraday trade, particularly where the buy and sell occur on the same day without resulting in delivery.

Surana says: “It is also pertinent to note that undertaking such transactions through two brokers may lead to higher transaction costs, as brokerage and securities transaction tax (STT) would apply on both the sale and purchase legs.”

Plus, it should be noted that as for the treatment of listed shares, under Section 45(2A) of the Income-Tax Act 1961 and CBDT Circular No. 768 dated 24 June 1998, that First-In-First-Out (FIFO) method would be adopted for capital gains computation.

Carry-forward and set-off of loss

The Income-tax Act, 1961 provides specific rules for setting off capital gains and losses, ensuring that taxpayers can offset losses against appropriate gains to minimize tax liability. The treatment varies based on whether the gains/losses are short-term (STCG/STCL) or long-term (LTCG/LTCL).

Loss arising from	Section 70- Intra-head set-off	Section 71- Intra-head set-off
Short term capital asset	Short Term Capital Gain & Long Term Capital Gain	Not Possible
Long term capital asset	Long Term Capital Gain	Not possible

Exemption Under Section 112A (Rs. 1.25 Lakh LTCG Exemption)

According to Section 112A of the IT Act, the Rs. 1.25 lakh LTCG exemption kicks in before setting off any Long-Term Capital Loss (LTCL). This means that in every financial year, the first Rs. 1.25 lakh of LTCG is automatically exempt from tax, irrespective of any losses. Only the LTCG exceeding Rs. 1.25 lakh is considered for set-off against LTCL. After adjusting the losses, any remaining LTCG is taxed. Therefore, LTCL cannot be set off against the exempt Rs. 1.25 lakh LTCG, but only against the taxable LTCG exceeding this threshold.