Two simple, perfectly legitimate techniques can reduce the capital-gains tax you pay — and most investors never use them. Both are best done before the financial year closes on 31 March. (Confirm current rules; tax law changes.)
1. Gain harvesting — bank the ₹1.25 lakh exemption
Long-term gains on equity (shares/equity funds held over 12 months) are tax-free up to ₹1.25 lakh each financial year. That exemption doesn't carry forward — unused, it's lost.
So each year you can sell enough long-term equity to realise gains up to ₹1.25 lakh, pay zero tax, and immediately rebuy. This "resets" your cost base higher, which means smaller taxable gains later. Over many years, systematically using the annual exemption meaningfully reduces the eventual tax on a large holding.
2. Loss harvesting — offset your gains
If you hold an investment that's underwater, you can sell it to book the capital loss and set that loss against realised gains, lowering your tax:
- Short-term capital loss offsets both short- and long-term gains.
- Long-term capital loss offsets only long-term gains.
- Unused losses carry forward for 8 years — but only if you file your return on time.
Booked a big short-term gain this year? Harvesting a loss elsewhere can cancel part of the tax on it. If you still believe in the investment, you can rebuy to keep your exposure.
Doing it cleanly
- No formal wash-sale rule currently applies in India (unlike the US), so rebuying is generally allowed — but avoid obviously artificial same-day round-tripping; keep it reasonable, or rebuy a similar (not identical) fund.
- Watch the friction: exit loads on recently bought units, STT, and the bid-ask spread on ETFs can eat into the benefit.
- Mind the date: trades must settle within the financial year to count, so act a few days before 31 March, not on the last day.
- Don't let the tax tail wag the dog. Never sell a holding you'd otherwise keep purely for a small tax saving, or buy a worse one to "harvest". The tax benefit is a bonus on top of sound decisions, not a reason to make bad ones.
A simple year-end routine
Each February–March: review realised gains for the year, use the ₹1.25 lakh equity exemption, book any worthwhile losses to offset gains, rebuy where you still want exposure, and file your ITR on time so any leftover losses carry forward. Fifteen minutes of housekeeping that quietly keeps more of your returns.