Every financial year, the first ₹1.25 lakh of long-term capital gains from listed equity is completely exempt from tax. If you're not deliberately booking these gains annually, you're leaving money on the table. Tax harvesting — systematically realising gains up to the exemption limit each year — is one of the simplest and most effective legal tax-saving strategies for equity investors in India.
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
Example: Annual Tax Harvesting on Equity MF
Priya invested ₹5 lakh in a Nifty 50 index fund in April 2023. By March 2025 (24 months later), the investment has grown to ₹7.2 lakh — a gain of ₹2.2 lakh.
Without harvesting: She keeps holding. When she eventually sells in 2030, all gains since 2023 are taxable.
With harvesting: In March 2025, Priya sells ₹1.25 lakh worth of gains (redeems enough units to realise ₹1.25 lakh LTCG). Tax = ₹0. Next day, she reinvests the same amount at current NAV — resetting her cost basis for those units to current price. In 2026, she repeats the same exercise.
How Much Can You Actually Save?
| Annual Harvesting | Tax Rate | Annual Tax Saving | 10-Year Cumulative Saving |
|---|
| ₹1.25 lakh LTCG exemption used each year | 12.5% | ₹15,625 per year | ₹1.56 lakh (simple; more with compounding of reinvested savings) |
₹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
- 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.
- 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.
- Reinvest immediately: Reinvest the redeemed amount back into the same or similar fund/stock at current prices. This resets your cost basis upward.
- Track new purchase date: The clock for the next 12-month holding period starts from the new purchase date.
- Repeat every year before 31 March.
⚠ Exit load and reinvestment timing: Many equity mutual funds charge exit load of 1% if redeemed within 1 year. If your fund has exit load, make sure the units you're redeeming were purchased more than 1 year ago. Also, keep in mind that the reinvested amount starts a fresh 12-month clock before qualifying for LTCG treatment again.
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)
Frequently Asked Questions
Can I do tax harvesting in both equity stocks and equity mutual funds in the same year? ▼
Yes, but the ₹1.25 lakh exemption applies to the aggregate LTCG from all equity sources — stocks, equity mutual funds, ETFs, and business trusts combined — in a financial year. If you book ₹80,000 LTCG from stocks and ₹70,000 from mutual funds, your total LTCG is ₹1.5 lakh — only ₹1.25 lakh is exempt, and ₹25,000 is taxable at 12.5% (₹3,125 tax). Plan across all equity holdings to stay within the exemption limit for the year.
If I sell and immediately rebuy the same mutual fund for tax harvesting, does the IRS (income tax department) question it? ▼
India does not have a formal wash-sale rule (unlike the US), so the Income Tax Act does not prohibit selling and immediately rebuying the same fund. However, if the rebuy is literally on the same day or the next day, the tax department could theoretically question the commercial substance of the transaction under General Anti-Avoidance Rules (GAAR). In practice, GAAR is invoked for large artificial transactions, not routine ₹1.25 lakh harvesting exercises. As a precaution, a 1-day gap is sufficient for most investors; 7-30 days provides more comfort for larger amounts.
Does the ₹1.25 lakh LTCG exemption apply per person or per family? ▼
Per person. Each individual taxpayer gets their own ₹1.25 lakh LTCG exemption per financial year. Spouses (if separately investing) each get ₹1.25 lakh — a couple can harvest ₹2.5 lakh in tax-free LTCG per year. Minor children's gains are clubbed with the parent's income and share the parent's exemption limit. An HUF gets its own separate ₹1.25 lakh exemption. So a family with individually invested portfolios across Husband, Wife, and HUF can harvest ₹3.75 lakh of LTCG tax-free every year.