Tax-saving for ITR Filing in AY 2025-26: Can tax loss harvesting help investors in a falling market?

Can equity investors, who have suffered capital losses in the last five months, benefit from tax loss harvesting before the end of FY 2024-25? Let's find out.

Tax loss harvesting is a tax-saving strategy that can be used by equity investors to minimise their tax liability or to make the most of their losses in a falling market. In this, investors offset capital losses against capital gains to reduce their overall tax outgo under both the old and new tax regimes.

"By selling underperforming assets at a loss, investors can neutralise gains from other investments and minimise taxable income," said CA Dr Suresh Surana.

However, to make this strategy work, you should have significant gains and losses to offset against each other. Additionally, investors should know the rules regarding offsetting of gains and losses under the Income-tax Act, 1961 to make the most of this strategy.

STCG offset rules

Currently, equity shares and equity-oriented mutual funds held for 12 months or less fall under short-term capital gains (STCG). This gain is taxed at 20% under Section 111A of the Income-tax Act, 1961.

According to Dr Surana, investors can offset short-term capital losses against both STCG and long-term capital gains (LTCG) to lower their taxable gains.

Please note that in case of short-term gains, securities sold before July 23, 2024 will be taxed at 15%.

LTCG offset rule

Currently, listed equity shares and units of equity-oriented mutual funds held for more than 12 months qualify as LTCG. The LTCG over ₹1.25 lakh from the sale of listed equity shares and equity-oriented mutual funds are taxed at 12.5% without indexation benefits.

Investors can offset their long-term capital losses only against LTCG to reduce their tax liability.

"Under Section 112A, LTCG up to ₹1.25 lakh per financial year is exempt from tax. Therefore, before utilising long-term capital losses, investors should determine whether their LTCG falls within this exemption limit, as gains below this threshold remain non-taxable. This ensures that capital losses are utilised efficiently to maximise potential tax savings," said Dr Surana.

Please note that LTCG of over ₹1 lakh from securities sold before July 23, 2024 will be taxed at 10%.

Tax loss harvesting example

Suppose your portfolio made LTCG of ₹3 lakh, STCG of ₹1 lakh and short-term capital loss of ₹80,000 after 23rd July 2024 (when the new tax rules of Budget 2024 came into force).

In this case, your tax liability without loss harvesting and with harvesting will be as follows:

Tax on STCG: ₹1,00,000*20% = ₹20,000

Tax on LTCG: (₹3,00,000-₹125000)*12.5% = ₹21,875

Total tax = ₹21,875+₹20,000 = ₹41,875

Tax on STCG: (₹1,00,000-₹80,000)*20% = ₹4000

Tax on LTCG: (₹3,00,000-₹1,25,000)*12.5% = ₹21,875

Total tax: ₹21,875+₹4000 = ₹25,875.

Thus your tax liability will reduce by ₹16,000 due to loss harvesting.

Please note that this example is for illustration purposes only. In a real-life situation, tax loss harvesting may not be as easy as it seems.

Moreover, loss harvesting may not make much sense when very small amounts are involved, or when you have reasons to believe that the stocks or securities you are considering to sell might see a spike in prices again.

What to do if you have booked more losses than gains

In case an investor's capital losses are higher than gains in a given financial year, then the unutilised losses can be carried forward for up to 8 years.

"To claim this benefit, taxpayers must declare the loss in their Income Tax Return (ITR) before the due date. Carried-forward losses can then be offset against eligible capital gains in subsequent years, allowing investors to optimise tax efficiency over time," said Dr Surana.

When to use the tax-loss harvesting strategy

While the tax-loss harvesting strategy is commonly employed at the end of the financial year, investors can incorporate this strategy in their regular portfolio management for continuous tax optimisation.

For income-tax return filing in FY 2025-26 (FY 2024-25), the last date to complete all tax-saving exercises is March 31, 2025. However, if you plan to go for tax loss harvesting in equity market for FY 2024-25, then do it by March 28 as stock markets would be closed on March 29, 30, and 31.

Key points to consider before tax loss harvesting

• Short-term capital losses can be offset against both STCG and LTCG

• Long-term capital losses can be offset only against LTCG.

• Tax loss harvesting can be used to manage tax liabilities across both short-term and long-term capital gains.

• An investor may not need to resort to this strategy if s/he is investing for a long-term and hasn't booked either loss or profit in the currently falling market.

• Investors should maintain accurate records and file tax returns within the prescribed due date

• Lastly, doing tax loss harvesting calculations on your own might seem confusing. Therefore, you should take help of professionals.