Tax‑Loss Harvesting: Save Taxes on Mutual‑Fund Gains
Most investors focus on how to make more returns. But smart investors also know how to make the most of their losses.
That’s where tax-loss harvesting comes in. It’s a simple yet powerful strategy that allows you to legally reduce your capital-gains tax by using your investment losses wisely. If you invest in mutual funds, understanding this approach before the financial year closes can make a meaningful difference to your portfolio and your wallet.
What Exactly Is Tax-Loss Harvesting?
In simple terms, tax-loss harvesting means selling investments that are temporarily in loss to offset gains you’ve made elsewhere.
Example: Suppose one of your equity funds gave you a ₹2 lakh gain this year, but another is down ₹80,000. By selling the loss-making fund before March 31, you can offset ₹80,000 against your gains, paying tax only on ₹1.2 lakh. A loss that felt like a setback turns into a smart tax-saving move.
How It Works?
1. Review your portfolio:
Start by taking a close look at your investments toward the end of the financial year. Identify funds that are currently showing a loss, what’s sometimes called a “paper loss.”
2. Redeem the loss-making units:
Next, sell the underperforming funds before March 31 to officially realise the loss. This is what turns a “paper loss” into a tangible tax-saving tool.
3. Offset your gains:
Once the loss is realised, it can be used to offset other gains in your portfolio. This step ensures that losses aren’t wasted, they directly reduce the tax you owe on profitable investments.
4. Reinvest strategically:
If you still believe in the fund or the investment category, reinvest in a similar scheme to maintain your portfolio allocation. Just avoid immediately buying back the exact same fund. This keeps your strategy compliant and avoids the impression of a “wash sale.”
Avoid the “Wash Sale” Trap
Selling and instantly buying back the same fund just to book a loss can raise red flags.
While India doesn’t formally have a wash-sale rule like the U.S., it’s good practice to:
1. Wait a few days before re-entering the same fund, or
2. Buy a similar fund in the same category (for example, another large-cap equity fund).
This way, your asset allocation stays intact and your tax move stays clean.
Equity vs Debt Funds
When it comes to tax-loss harvesting, the rules differ between equity and debt mutual funds, and understanding these nuances can make a big difference in your after-tax returns.
|
Type of Asset
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Holding Period
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Nature of Gain/Loss
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Tax Rate
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Eligible for Set-off Against
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Remarks
|
|---|---|---|---|---|---|
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Equity Shares (STT Paid)
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< 12 months
|
Short Term (STCG)
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20%
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STCG and Long term Loss (Equity)
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STT must be paid
|
|
Equity Shares (STT Paid)
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> 12 months
|
Long Term (LTCG)
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12.5% (above ₹1.25 lakh exempt)
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LTCL (Equity)
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STT must be paid
|
|
Investment Before 01 -Apr 2023
|
|||||
|
Debt Funds
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< 24 months
|
Short Term (STCG)
|
Slab Rate
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Any STCG Loss and LTCG
|
|
|
Debt Funds
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> 24 months
|
Long Term (LTCG)
|
12.5% (with out indexation )
|
Any LTCL
|
|
|
Investment After 01 -Apr 2023
|
|||||
|
Debt Funds
|
|
Short Term (STCG)
|
Slab Rate
|
Any STCG Loss and LTCG
|
All gains are considered Short-Term Capital Gains (STCG), regardless of the holding period.
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Equity Funds: Gains held over 1 year enjoy LTCG tax at 12.5% (above ₹1.25L); short-term gains are taxed at 20%. Losses can offset gains strategically: LTCG offsets LTCG, STCG offsets both STCG and LTCG.
Debt Funds: Post-April 2023, gains are taxed at your income-tax slab. Losses can be used to offset gains, whether short-term or long-term, making them useful for tax planning.
When Tax-Loss Harvesting Makes the Most Sense?
1. At the End of the Financial Year
The period just before March 31 is prime time for tax planning. By reviewing your portfolio now, you can identify funds showing losses and strategically realise them to offset gains elsewhere.
2. After a Market Correction
Market dips can be unnerving, but they also create opportunities. When certain equity or debt funds are temporarily down, selling them to realise a loss can turn a short-term setback into a tax advantage.
3. During Portfolio Rebalancing
Rebalancing is when you adjust your investments to maintain your target asset allocation. For example, shifting from equity to debt or vice versa. If some funds are underperforming, realising the losses while rebalancing can serve a dual purpose: aligning your portfolio with your goals and using the losses to offset gains, reducing your overall tax liability.
Common Pitfalls to Avoid
Chasing losses: Don’t sell a fundamentally strong fund just for a tax break.
Bad timing: Be mindful. Selling too soon might create new short-term gains.
Skipping documentation: Maintain clear records for audit trail.
Immediate buyback: Avoid re-entering the same scheme right away.
The Smart Investor’s Takeaway
Markets move in cycles; not every fund performs every year. By managing both gains and losses strategically, you enhance your after-tax returns without taking additional risk.
At PrimeWealth, we review portfolios holistically combining asset allocation, tax efficiency, and long-term goals.
Tax efficiency isn’t a one-time exercise, it’s part of a larger financial journey.
If you’re seeking ongoing, holistic advice, we’d be happy to help you.
Book a consultation to start your financial planning conversation.
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