Pay Rs 62,400 extra income tax if you are using tax harvesting with Rs 12.75 lakh salary; Here’s what to do

Income tax harvesting refers to a method where you sell your listed equity shares and/or equity oriented mutual funds and then buy it back on a convenient date in order to take advantage of LTCG tax exemption of Rs 1.25 lakh or loss carry-forward and set-off provisions.

For example: In tax gains harvesting: You sell the listed equity shares and/or equity mutual funds which are in profits up to Rs 1.25 lakh as this is the maximum amount of long term capital gains (LTCG) which is exempt from tax. Once you sell on or before March 31, 2026 then you buy the same assets on a convenient date in order to stay true to your financial plan.

But one of the biggest disadvantages for this tax harvesting method is that the LTCG amount is first added to your total income and then the tax exemption is given. This means if your income is Rs 12 lakh from salary and LTCG from equity mutual funds is Rs 1.25 lakh, then your total income would be Rs 12+1.25= 13.25 lakh. This results in extra Rs 62,400 income tax since Section 87A tax rebate is not applicable for salary income more than Rs 12.75 lakh (salaried taxpayers get Rs 75,000 flat standard deduction). In simple terms, even though you got a salary of Rs 12 lakh, you won’t get any tax benefit by way of Section 87A tax rebate due to the LTCG of Rs 1.25 lakh.


More Section 87A tax rebate is not available for LTCG and STCG from equity income pursuant to amendment made in the Income Tax Act.

Also read: Section 87A rebate rule correction: No income tax till income of Rs 12.75 lakh for salaried individuals except this income

Why does Rs 62,400 extra income tax need to be paid by salaried employees if using tax harvesting with a Rs 12.75 lakh salary?

Chartered Accountant Abhishek Soni, co-founder, Tax2Win says that this situation arises because of how Section 112A and the rebate under Section 87A work together in the new tax regime.

Soni says: “Under Section 112A, long-term capital gains (LTCG) on equity up to Rs 1.25 lakh are taxed at 0%, so there is no tax on such gains. However, these gains are still included in your total income.”

Soni says that at the same time, Section 87A allows a full tax rebate only if your total income does not exceed Rs 12 lakh. The problem arises when your income is close to this limit and you earn LTCG. Even though the LTCG itself is tax-free, it pushes your total income above Rs 12 lakh, making you ineligible for the rebate.

Soni says: “As a result, you lose the rebate benefit and end up paying tax on your entire taxable income. This is why a “tax-free” gain can still lead to an actual tax liability.”

Also read: Tax harvesting before March 31, 2026? Watch these three hidden costs that can reduce your tax savings

Calculations

If the LTCG is 1.25 lakh, the tax will be calculated as follows -

Particulars	Case 1	Case 2	Case 3
Gross salary	Rs 10,75,000	Rs 12,75,000	Rs 14,75,000
Less: Standard deduction	(Rs 75,000)	(Rs 75,000)	(Rs 75,000)
Salary Income	Rs 10,00,000	Rs 12,00,000	Rs 14,00,000
LTCG under Section 112A	Rs 1,25,000	Rs 1,25,000	Rs 1,25,000
Net Income	Rs 11,25,000	Rs 13,25,000	Rs 15,25,000
Tax before rebate	Rs 40,000	Rs 60,000	Rs 90,000
Rebate under Section 87A	(Rs 40,000)	Rs 0	Rs 0
Tax before cess	Rs 0	Rs 60,000	Rs 90,000
Cess @ 4%	Rs 0	Rs 2,400	Rs 3,600
Final tax payable	Rs 0	Rs 62,400	Rs 93,600
Extra tax due to harvesting	Rs 0	Rs 62,400	Rs 0

Source: Tax2Win

Here's what to do

As can be seen from the above calculations, tax harvesting method results in higher tax outgo for Rs 12.75 lakh salary earners but for others it does not. So if you salary income is less than Rs 12.75 lakh then you can use tax harvesting method to book long term capital gains up to Rs 1.25 lakh. For higher salary levels, you can also take advantage of LTCG tax exemption up to Rs 1.25 lakh since this does not result in higher tax outgo. Those who earn Rs 12.75 lakh salary needs to be careful.