Tax Harvesting After Income-tax Act 2025 Transition: Step-by-Step Compliance Playbook

By Finin2min Research Desk Updated Jun 2026 Tax Year 2026-27 Investors

Tax harvesting — booking gains up to the ₹1.25 lakh LTCG exemption and/or booking losses to offset gains — remains one of India's most powerful yet underutilised investment tools. Under the Income-tax Act 2025 (effective 1 April 2026), the ₹1.25L LTCG exemption is codified under Section 55(2). The LTCG rate on equity moved to 12.5% (Budget 2024) and STCG to 20%. This guide gives you the step-by-step playbook to harvest correctly, avoid common mistakes, and comply with the new Act's section references.

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Capital Gains Tax Rates — Tax Year 2026-27 Quick Reference

Asset Type	STCG Rate	LTCG Rate	LTCG Exemption
Listed equity shares (STT paid)	20% (Section 55(1))	12.5% (Section 55(2))	₹1.25L/year
Equity mutual funds (STT paid)	20%	12.5%	₹1.25L/year
Debt mutual funds (post-Apr 2023)	Slab rate	Slab rate	None
Immovable property	Slab rate	12.5% (or 20% with indexation)	Section 58 exemptions
Gold ETF / Sovereign Gold Bond (exchange)	Slab rate	12.5%	None

LTCG Harvesting — How It Works

LTCG harvesting means booking long-term capital gains on equity/equity MF up to ₹1.25L per year (the exempt threshold) — then immediately buying back the same units at the higher price. The effect:

You pay zero tax on the booked gains (within ₹1.25L exempt limit)
Your cost of acquisition "resets" to the new higher price
Future gains are calculated from the new (higher) base — reducing future tax liability
No wash-sale rule in India — you can rebuy the same fund immediately after selling

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No Wash-Sale Rule: India does not have a wash-sale provision like US tax law. You can sell a fund for a loss (or gain) and repurchase the same fund the very next day. This makes tax harvesting clean and straightforward compared to US investors who must wait 30 days.

Step-by-Step LTCG Harvest — Tax Year 2026-27

Check Your Unrealised LTCG by February–March 2027

Log in to your mutual fund platform / broker. Download your capital gains statement. Identify all equity positions held 12+ months with unrealised LTCG. Sum the LTCG across all positions.

Redeem Units with Gains Up to ₹1.25L

Sell equity mutual fund units or shares with LTCG up to ₹1.25 lakh. Include any LTCG already booked earlier in the year — the ₹1.25L is an annual cap. Leave any amount above ₹1.25L unrealised (or harvest losses to offset).

Reinvest Proceeds Immediately

Buy back the same fund(s) on the next trading day or same day. Your new units now have a higher cost — reducing future LTCG accumulation on the same investment.

Report in ITR-2 Under Schedule CG

All capital gain transactions (even if exempt) must be reported in Schedule CG of ITR-2. Claim the exemption under the ₹1.25L threshold. Missing this disclosure can attract 143(1) scrutiny.

Case Study: Aryan's Annual Harvest — 10-Year Compounding of Tax Savings

Software Engineer, Bengaluru — ₹30L Equity Portfolio

Aryan has been doing annual LTCG harvesting since FY2020-21. In Tax Year 2026-27, his Nifty index fund shows LTCG of ₹2,80,000 (12+ months holding).

He sells units worth ₹1,25,000 LTCG in March 2027 — pays zero tax (within exempt limit)
Immediately reinvests: his cost base is now ₹1,25,000 higher for those units
Without harvesting: this ₹1.25L would compound and eventually attract 12.5% LTCG tax = ₹15,625 deferred tax liability
The remaining ₹1.55L LTCG remains unrealised — no tax yet

Tax saved this year

₹0 (stays exempt)

Future tax avoided

₹15,625 on reset gains

Over 10 years of consistent annual harvesting, Aryan saves approximately ₹1.2–1.5L in total LTCG tax while keeping his portfolio fully invested. The compounding effect of tax savings is significant for long-term wealth building.

Tax Loss Harvesting — Booking Losses to Offset Gains

If you have unrealised losses in some positions alongside gains in others, you can book losses to neutralise tax. Set-off rules under the new Act:

Loss Type	Can Set Off Against	Carry Forward
Short-term capital loss (STCL)	STCG or LTCG	8 years — against STCG or LTCG
Long-term capital loss (LTCL)	LTCG only (not STCG)	8 years — against LTCG only
Speculation loss	Speculation profit only	4 years

Example: You have ₹3L LTCG on Infosys shares and ₹1.8L unrealised loss in a mid-cap fund. Book the ₹1.8L loss → net LTCG = ₹1.2L → below ₹1.25L → zero tax. Reinvest immediately in same or similar fund.

Common Mistakes in Tax Harvesting

Mistake	Consequence	Correct Approach
Harvesting LTCG above ₹1.25L (assuming the exemption is per fund)	Excess LTCG taxable at 12.5%	₹1.25L is an aggregate annual limit across all equity assets
Not reporting capital gains in ITR even if exempt	143(1)(a) intimation / scrutiny	Always report in Schedule CG — even nil-tax gains
Harvesting in wrong account (spouse's)	Clubbing — gains attributed back to transferor	Harvest in your own account independently
Booking STCL and treating it as LTCL set-off	Carry forward rules differ; incorrect ITR	STCL offsets both STCG and LTCG; LTCL only offsets LTCG
Late ITR — capital loss carry forward disallowed	Lose 8-year carry forward benefit	File by 31 August 2027 (Tax Year 2026-27 due date)

Tax Harvesting Playbook — Tax Year 2026-27

₹1.25L LTCG exemption resets every Tax Year — harvest up to this amount annually
STCG at 20% and LTCG at 12.5% under new Act — loss booking is even more valuable
No wash-sale rule — rebuy the same fund immediately after selling
Report all gains/losses in Schedule CG of ITR-2 — even exempt amounts
File ITR by 31 August 2027 to preserve capital loss carry forwards
Debt MF gains are now at slab rate — no LTCG benefit; focus harvesting on equity/equity MF
Consider joint holding — each spouse gets separate ₹1.25L LTCG exemption

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Frequently Asked Questions

The LTCG exemption for listed equity shares and equity mutual funds is ₹1.25 lakh per Tax Year under Section 55(2) of the Income-tax Act 2025 (equivalent of old Section 112A). LTCG above ₹1.25L is taxed at 12.5%. The exemption resets every year, making annual LTCG harvesting — selling gains up to ₹1.25L and reinvesting — a zero-tax compounding strategy.

Yes, and India has no wash-sale rule — you can sell a loss-making fund and repurchase it immediately. Short-term capital loss offsets both STCG and LTCG; long-term capital loss offsets only LTCG. Unabsorbed losses carry forward for 8 years. Always file ITR on time (31 August 2027 for Tax Year 2026-27) to preserve carry-forward rights.