What is tax loss harvesting? How can you save taxes if you are facing stock market losses?

ITR filing 2025: When it comes to paying taxes on equities, you are only required to pay income tax when you decide to sell your holdings. This means that while you are responsible for paying taxes on your gains, you also have the opportunity to offset any losses incurred. 

Tax-loss harvesting is a tax-saving strategy that equity investors can utilise to reduce their tax liability or capitalise on losses in a declining market. By offsetting capital losses against capital gains, investors can minimise their overall tax expenses under both the old and new tax regulations. Through selling underperforming assets at a loss, investors can effectively balance gains from other investments and lower their taxable income.

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By utilising this strategy, investors have the opportunity to reduce their tax liability by offsetting losses with gains. Selling underperforming assets at a loss can help to balance out profits from other investments and decrease overall taxable income. While commonly employed towards the end of the fiscal year, tax loss harvesting can also be incorporated into regular portfolio management for continual tax efficiency.

This technique is applicable to both Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG). It is especially beneficial for LTCG under Section 112A, as there is a threshold exemption of Rs. 1.25 lakh before taxable gains are calculated.

Offset rules: Short-term and Long-term

It is important for investors to be familiar with the regulations on offsetting gains and losses under the Income-tax Act, 1961 in order to effectively utilise this strategy.

Short-term capital gains: Equity shares and equity-oriented mutual funds held for less than 12 months are considered short-term capital gains (STCG) and are taxed at 20% under Section 111A of the Income-tax Act, 1961. However, securities sold before July 23, 2024 will be taxed at 15%.

Investors can offset their short-term capital losses against both STCG and long-term capital gains (LTCG) to minimize their taxable gains.

Long-Term Capital Gains: Listed equity shares and equity-oriented mutual funds held for over 12 months fall under long-term capital gains (LTCG). LTCG over Rs 1.25 lakh are taxed at 12.5% without indexation benefits. Investors can only offset their long-term capital losses against LTCG to reduce their tax burden.

According to Section 112A, long-term capital gains (LTCG) up to Rs 1.25 lakh per financial year are not subject to taxation. It is important for investors to assess whether their LTCG falls under this exemption limit before offsetting long-term capital losses. Gains below this threshold are not taxable, allowing for efficient utilisation of capital losses and maximising potential tax savings. LTCG exceeding Rs 1 lakh from the sale of securities prior to July 23, 2024 will be taxed at a rate of 10%.

More losses than gains

In current market conditions, investors might have incurred more losses than gains. If an investor experiences capital losses exceeding gains in a specific financial year, the unused losses can be carried forward for a maximum of 8 years. 

If an individual's capital losses surpass gains in the current year, they can carry forward the remaining losses for up to 8 financial years. To avail of this benefit, taxpayers must report the loss in their Income Tax Return (ITR) by the applicable due date. These carried-forward losses can be utilized to offset eligible capital gains in subsequent years, enabling investors to enhance their tax efficiency over time.

It should be noted that short-term capital losses can offset both short-term and long-term capital gains, whereas long-term capital losses can only offset long-term capital gains. Tax loss harvesting is a valuable strategy for managing tax obligations related to both short-term and long-term capital gains. By taking advantage of the set-off provisions in the Income-tax Act, investors can effectively enhance their tax efficiency and reduce their capital gains tax liabilities.

To ensure timely income-tax return filing for FY 2025-26 (FY 2024-25), make sure to complete all tax-saving exercises by March 31, 2025. If you intend to engage in tax loss harvesting in the equity market for FY 2024-25, it is recommended to do so by March 28 as the stock markets will be closed on March 29, 30, and 31.

Points to note

Offsetting short-term capital losses against both short-term and long-term capital gains
Offsetting long-term capital losses only against long-term capital gains
Using tax loss harvesting to manage tax liabilities for both short-term and long-term capital gains
Considering the necessity of this strategy based on investment goals, market conditions, and existing gains or losses
Maintaining accurate records and adhering to tax return filing deadlines
Seeking assistance from professionals for complex tax loss harvesting calculations