When the Market Gives You Lemons:
A Guide to Tax-Loss Harvesting in India
Let’s be honest. Opening your portfolio app on a “Red Day” feels a bit like watching your favorite cricket team collapse for under 100 runs. It hurts. You see those negative numbers, and your instinct is to close the app, throw your phone under the bed, and pretend you never invested in “Next-Gen AI Tech” stocks at their peak.
But what if I told you that those painful red numbers could actually save you money?
Welcome to the world of Tax-Loss Harvesting. It’s the financial equivalent of finding a 500-rupee note in the jeans you just put in the laundry. It doesn’t fix the mess, but it definitely makes you feel better.
Especially in volatile markets—where the Sensex swings like a pendulum—this strategy is your best defense. Let’s break down how you can legally reduce your tax bill by booking losses, all while keeping the taxman happy.
The “New Normal” for Taxes (Post-July 2024)
Before we dive into the strategy, we need to talk about the elephant in the room: The Union Budget of July 2024. The government decided that your profits looked a little too healthy, so they hiked the rates.
- Short-Term Capital Gains (STCG): Increased to 20% (previously 15%).
- Long-Term Capital Gains (LTCG): Increased to 12.5% (previously 10%).
- LTCG Exemption: The tax-free limit was raised to ₹1.25 Lakh per year.
Why does this matter? Because higher tax rates mean saving tax is now more valuable than ever. A ₹10,000 loss harvested today saves you more tax money than it did two years ago.
What is Tax-Loss Harvesting?
Imagine you sold some shares of Company A and made a handsome profit of ₹2 Lakhs. Congratulations! The taxman is now eyeing his 20% cut (if it was short-term).
But, you are also holding shares of Company B, which are currently down by ₹50,000.
If you sell Company B and book that ₹50,000 loss, the Income Tax Department allows you to subtract it from your ₹2 Lakh profit. Your “Net Taxable Profit” becomes ₹1.5 Lakhs. You just legally reduced your tax bill.
The Mantra: Realize losses to offset gains, then reinvest the money to stay in the market.
The “Caste System” of Losses: Set-Off Rules
Not all losses are created equal. The Income Tax Act has specific rules on which loss can meet which gain. Think of it like a strict Indian wedding—horoscopes must match.
| Type of Loss | Can Be Offset Against | Cannot Be Offset Against |
|---|---|---|
| Short-Term Capital Loss (STCL) | ✅ Both STCG and LTCG | ❌ Salary or Business Income |
| Long-Term Capital Loss (LTCL) | ✅ Only LTCG | ❌ STCG (Strictly forbidden!) |
The Golden Rule: Short-term losses are more powerful because they are flexible. Long-term losses are picky.
Strategy for Volatile Markets: Don’t Wait for March 31st
Most investors lazy-harvest in March. But in a volatile market, the best opportunities happen randomly.
If the market crashes 5% in August, that is your harvest season. Don’t wait for the financial year-end when the market might have recovered.
Don’t just sell and sit on cash (you might miss the recovery). Sell the loss-making stock and immediately buy a highly correlated stock or a Sectoral Mutual Fund/ETF.
Example: Sell Infosys at a loss? Buy TCS or a Nifty IT ETF immediately. You book the tax loss but keep your exposure to the IT sector alive.
The “Wash Sale” Trap: Does India Have One?
In the US, if you sell a stock and buy it back within 30 days, the tax loss is disallowed. This is called the “Wash Sale Rule.”
Does India have this? Technically, no. There is no specific section in the Income Tax Act that says “30 days.”
However (and this is a big however): We have something called GAAR (General Anti-Avoidance Rule). If the tax officer sees that you sold Reliance at 10:00 AM to book a loss and bought it back at 10:02 AM, they can claim this transaction lacks “commercial substance” and was done only to avoid tax.
Safe Practice: avoid same-day buybacks. Wait a few days, or better yet, use the “Switch Strategy” mentioned above to buy a different (but similar) asset.
Common Mistakes to Avoid
1. The “FIFO” Blunder
India follows the First-In-First-Out (FIFO) method. When you sell shares, the system assumes you are selling the oldest ones first.
Scenario: You bought Tata Motors in 2020 (huge profit) and again in 2024 (loss). If you sell today hoping to book the 2024 loss, the system will actually sell your 2020 shares first, triggering a massive tax bill instead of a loss! Check your portfolio carefully before hitting sell.
2. Ignoring Transaction Costs
Remember, selling and buying involves brokerage, STT (Securities Transaction Tax), and DP charges. Don’t harvest a ₹500 loss if your transaction costs are ₹200. It’s not worth the headache.
3. Forgetting to File ITR
This is the most tragic mistake. If you have a net loss for the year, you must file your Income Tax Return (ITR) by the due date (usually July 31st). If you don’t file, you lose the right to carry forward that loss to future years.
Frequently Asked Questions (FAQ)
