Planning tax harvesting before March 31, 2026? Here are 5 things you must know

It is that time of year when you would be hearing a lot of chatter around tax harvesting. It is a tax-saving strategy in which seasoned investors reduce their overall tax liability by offsetting capital losses from one investment against gains from another.

For instance, one can sell an underperforming asset at a loss to neutralise gains from other investments. This way, one can reduce the total tax liability.

1)Tax-saving deadline: You must complete any tax-saving activity, including tax harvesting, for FY 2025-26 by March 31, 2026. It would be better to do it days before the end of the month to avoid any last-minute rush.

2)What can be set off against what

• Long-term loss can be set off only against long-term gains

• Short-term loss can be offset against both short-term and long-term gains.

Long-term capital gains from equity above ₹1.25 lakh are taxed at 12.5% while short-term gains from them are taxed at 20%.

3)Both tax-loss harvesting and tax-gain harvesting are often used interchangeably. Although the purpose of both activities remains the same, they differ in the way you approach them:

• In tax-loss harvesting, you sell a loss-making equity investment and offset the loss against capital gains to reduce tax. Such losses can also be carried forward for up to eight assessment years. However, you must file ITR before the due date to carry forward your losses.

• In tax-gain harvesting, you can sell a long-term equity investment to book gains up to ₹1.25 lakh, which is exempt from tax. You can reinvest the total sale proceeds to remain invested.

4)As LTCG up to ₹1.25 lakh per financial year is exempt from tax under Section 112A of the Income-tax Act 1961, you should determine whether your LTCG falls within the exemption limit of ₹1.25 lakh, as gains below this threshold remain non-taxable. This will ensure that your capital losses are utilised efficiently to maximise potential tax savings.

5)While this strategy works for many individuals, you need to be sure whether or not it works for you. Don't do tax harvesting out of FOMO. You need to check the overall impact of such a move on your long-term financial goals as well as short-term cash flow needs. Sometimes, doing tax loss harvesting calculations on your own might seem confusing. In such cases, you may consider taking the help of a professional.