Tax Loss Harvesting in FY 2025-26:  A Smart Way to Reduce Your Tax Liability

Tax loss harvesting is a tax planning strategy that allows taxpayers, especially investors, to lower their capital gains tax liability by selling securities at a loss. These losses can be used to offset capital gains, effectively reducing the net taxable amount. As the financial year 2025-26 progresses, understanding this strategy is key to making the most of your investment portfolio while staying compliant with Indian tax laws.

What is Tax Loss Harvesting?

Tax loss harvesting involves selling capital assets—typically stocks, mutual funds, or ETFs—that are currently valued lower than their purchase price, thereby realizing a capital loss. This realized loss can then be set off against realized capital gains (short-term or long-term) from other investments, reducing your total tax liability.

Reinvestment Strategy

Investors often repurchase the same or a similar asset after selling it, to maintain their portfolio exposure while still benefiting from the realized tax loss. However, one must be cautious with timing and potential GAAR (General Anti-Avoidance Rules) implications.

Legal Framework in India (FY 2025-26)

In India, capital gains and losses are taxed under the Income Tax Act, 1961. Here’s how it applies to tax loss harvesting:

Classification of Capital Gains

• Short-Term Capital Gain (STCG): Gains on equity shares or equity mutual funds held for 12 months or less. Taxed at 20%.
• Long-Term Capital Gain (LTCG): Gains on such assets held for more than 12 months. Taxed at 12.5% (above ₹1.25 lakh) without indexation.

Set-Off and Carry Forward Rules (as per Section 70 & 74

Important: Losses can be carried forward only if the income tax return is filed within the due date under Section 139(1).

 How Does Tax Loss Harvesting Work?

 Example:

• You sold a mutual fund unit for a profit (STCG) of ₹1,00,000.
• You hold shares in a company that are currently at a loss of ₹40,000.
• By selling the loss-making stock before March 31, 2026, and realizing the loss, you reduce your net STCG to ₹60,000.
• Tax saving: 20% of ₹40,000 = ₹8,000 saved in tax.

 Tax Planning Considerations for FY 2025-26

1. Timing is Crucial: You must realize losses before the financial year ends (March 31, 2026).

2. Wash Sale Rule: While India does not explicitly have a “wash sale” rule like the US, repetitive transactions could attract scrutiny under GAAR. Avoid buying back the same asset immediately after selling.

3. Securities Transaction Tax (STT): Tax loss harvesting applies to listed securities and mutual funds where STT is applicable.

4. Portfolio Rebalancing: This strategy is not just about tax savings—it’s also a good opportunity to reassess and rebalance your portfolio.

Common Mistakes to Avoid

• Missing the return filing deadline and losing the benefit to carry forward losses.
• Not checking if losses are short-term or long-term before set-off.
• Buying the same asset back too soon and attracting GAAR implications.
•  Not maintaining proper documentation of purchase and sale for audit/tracking.

Ideal for Whom?

• Active stock market traders and equity mutual fund investors.
• High-net-worth individuals (HNIs) with sizable capital gains.
• Portfolio managers and tax-savvy retail investors.

Tax Loss Harvesting & the New Regime

If you have opted for the New Tax Regime under Section 115BAC, note that capital gains taxation remains unaffected—it applies equally under both old and new regimes. So, tax loss harvesting continues to be a valid strategy regardless of the regime you’ve opted for.

 Checklist for Tax Loss Harvesting (FY 2025-26)

•  Review your portfolio for unrealized losses.
•  Classify them into STCL or LTCL.
•  Match with realized capital gains.
•  Sell loss-making assets before 31st March 2026.
•  Maintain documentation.
•  Reinvest with proper gap to avoid GAAR implications.
•  File ITR before the due date (likely 31st July 2026 for individuals).

Final Words

Tax loss harvesting is a powerful tool to reduce your tax burden legally and smartly. With the correct understanding and timely execution, it can significantly enhance your post-tax returns. As we move through FY 2025-26, make sure you periodically assess your portfolio and consult with tax experts to make informed decisions.