LTCG Tax Harvesting in India: How to Legally Save ₹15,600+ Every Year

The ₹1.25 Lakh LTCG Exemption: The Foundation

Under Section 112A of the Income Tax Act, long-term capital gains from:

• Listed equity shares (held 12+ months, STT paid on both purchase and sale)
• Units of equity-oriented mutual funds (held 12+ months)
• Units of business trusts

…are taxed at 12.5% — but only on gains exceeding ₹1.25 lakh in a financial year. The first ₹1.25 lakh of LTCG per financial year is completely tax-free.

Tax harvesting exploits this exemption by deliberately booking gains up to ₹1.25 lakh each year — so you reset your cost of acquisition to the current (higher) price, and the gains you've already crystallised are tax-free.

How Tax Harvesting Works: A Step-by-Step Example

How Much Can You Actually Save?

₹15,625 per year may sound modest, but: (1) it's money you would otherwise pay as tax with zero additional investment, (2) the reinvested tax saving itself compounds over time, and (3) it applies per person — a couple who both harvest can save ₹31,250 per year combined.

Step-by-Step Tax Harvesting Process

1. Calculate your unrealised LTCG: In March each year, check the long-term gains on your equity portfolio (available on your broker's platform or fund statement). For mutual funds: units held 12+ months with gain.
2. Determine how much to book: If LTCG is ₹3 lakh, you can book ₹1.25 lakh tax-free. Redeem sufficient units to crystallise exactly ₹1.25 lakh gain.
3. Reinvest immediately: Reinvest the redeemed amount back into the same or similar fund/stock at current prices. This resets your cost basis upward.
4. Track new purchase date: The clock for the next 12-month holding period starts from the new purchase date.
5. Repeat every year before 31 March.

Tax Loss Harvesting: The Complementary Strategy

Alongside LTCG harvesting, consider tax-loss harvesting — deliberately realising losses to offset taxable gains:

• If you have unrealised losses in some equity positions and taxable LTCG from others, sell the loss positions to offset the gains
• Short-term capital loss (STCL) can offset both STCG and LTCG
• Long-term capital loss (LTCL) can only offset LTCG
• After selling loss positions, you can repurchase after 30+ days (no formal wash-sale rule in India, but advisable to wait to demonstrate genuine economic intent)

For detailed set-off rules, see our loss set-off guide.

Grandfathering: The Pre-Feb 2018 Cost Basis

LTCG on equity (Section 112A) was reintroduced from 1 April 2018. For equity shares and equity MFs purchased before 31 January 2018, the cost of acquisition is "grandfathered" — it's the higher of:

• Actual purchase price, OR
• Fair Market Value (FMV) as on 31 January 2018 (closing price on that date for listed shares; NAV for mutual funds)

Any gains accrued up to 31 January 2018 are fully exempt — only gains from 1 February 2018 onwards are taxable under Section 112A. If you still hold pre-2018 investments, your actual taxable gain (and hence the optimal harvesting amount) requires computing the grandfathered cost first.

When NOT to Harvest (or Harvest Less)

• If you're in a year with large STCG (short-term gains) — LTCG harvesting on top adds to total tax
• If the units you'd need to sell are still within the exit load period
• If you've already used the ₹1.25 lakh exemption through other equity sales in that year
• If the reinvestment involves significant transaction costs (e.g., brokerage on large direct stock purchases)