Tax Harvesting After Income-tax Act 2025 Transition: Step-by-Step Compliance Playbook
Reviewed by CA Nikhil Gupta · Last reviewed 26 September 2026
Corrected 26 September 2026: the earlier version cited Sections 55(1), 55(2), 58 and 72 for the equity capital-gains rules and exemptions (they are Sections 196, 198, 82/85/86 and 111) and gave 31 August 2027 as the return due date for all taxpayers (it is 31 July 2027 for salaried taxpayers; 31 August applies to non-audit business income).
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 sits in Section 198 (old Section 112A). 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.
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 196) | 12.5% (Section 198) | ₹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) | Sections 82, 85, 86 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
Step-by-Step LTCG Harvest — Tax Year 2026-27
Case Study: Aryan's Annual Harvest — 10-Year Compounding of Tax Savings
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
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 the Section 263(1) due date — 31 July 2027 for salaried taxpayers; 31 August 2027 if you have non-audit business income |
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 the due date (31 July 2027 for salaried taxpayers; 31 August 2027 for non-audit business income) to preserve capital loss carry forwards (Section 121)
- 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
Frequently Asked Questions
Source and review trail
Use the current official instrument, portal or regulator publication before acting. This panel separates the category authority from page-specific references.
- Primary category
- Income Tax
- Official starting point
- www.incometaxindia.gov.in
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