Dear Traders,

Based on social media posts, it appears that the increased tax rates on capital gains in last year’s budget have made equities less attractive. The Union Budget 2025 left the rates unchanged, offering little relief. But there is a way for smart investors to reduce their tax liability on capital gains from equities.

Before delving into tax loss harvesting and tax gain harvesting – which are the technical terms for these actions, let’s first understand the set-off provisions and tax rates. Gains booked by selling listed shares (and units of equity mutual funds including exchange traded funds) after holding them for one year or more are considered long-term capital gains (LTCG) and are taxed at a rate of 12.5%, if they exceed Rs 1.25 lakh in a financial year.

Watch this video to learn more about this.

For gains booked in less than one year, they are considered short term capital gains (STCG), and are taxed at a rate of 20%. Importantly, capital gains can be set off against capital losses. LTCG can be set off against long term capital losses (LTCL). STCG can be set off against short term capital loss (STCL) as well as LTCL. Let’s understand this with a couple of examples.

Anish has booked STCG of Rs 5 lakh in stock A. He has also booked STCL of Rs 1.5 lakh in stock B and LTCL of Rs 1 lakh in stock C. After setting off his gains with his losses, he is left with a STCG of Rs 2.5 lakh, which will be taxed at a rate of 20% plus surcharge, as applicable.

Raman has booked STCG of Rs 3 lakh in stock A. He has also booked STCL of Rs 5 lakh in stock B. After setting off his gains with his losses, he is left with a STCL of Rs 2 lakh. This loss can be carried forward for eight assessment years and set off against future gains, provided Raman files income tax returns before the due date.

Now, let’s look at situations where a few smart moves can help in better tax planning.

Most of us have multiple holdings in our equity portfolios. Some stocks are in gains, while others are in losses. An investor may choose to book losses to reduce her tax liability through ‘tax loss harvesting’. The same stock can be bought back on the next trading day. The only risk the investor is exposed is the possibility of stock going higher than the price at which it is sold. However, given the benefit of reduced tax liability it is worth the effort. Let’s understand tax loss harvesting with an example.

Rajendra booked LTCG of Rs 3 lakh in stock A. After accounting for the exemption limit of Rs 1.25 lakh, he is left with LTCG of Rs 1.75 lakh. If he has been holding a stock B over a year and is facing losses of let’s say Rs 1 lakh, then he should sell the stock and book LTCL. This will allow him to set off the loss and reduce LTCG to Rs 75,000 and will pay tax on that at the rate of 12.5%. If he has more loss-making stocks, he can further decrease his tax liability by booking losses in them.

If Rajendra believes that the stock B will recover in future, he can repurchase that stock. An important caveat here: The stock should not be sold and repurchased on the same day, as this would be considered an intra-day transaction. To book the loss, the investor must deliver the stock. Hence repurchasing should be done on the following day.

A trader can also book STCL to reduce the tax liability that arises from booking STCG, as described above.

This strategy is all about reducing tax liability in a given year, where an investor has already booked profits. However, a prudent investor will also consider future gains and plan for them in advance. This tax gain harvesting technique can be better understood with an example.

Sanchita has been holding stock A for over 2 years and currently has a LTCG of Rs 5 lakh. As mentioned earlier, in any given year, LTCG up to Rs 1.25 lakh are exempt from tax. In this case, if she sells some shares of A in such manner that the LTCG booked amounts to Rs 1.25 lakh, then she will not be required to pay tax on it. She can repurchase the same quantity of stock the following day and reinstate her holding. The newly acquired shares are yet to see capital gains. This strategy effectively reduces her tax liability in the future.

Tax gain harvesting should ideally be done with LTCG where there is an exemption available and the investor has a long-term view. Before we conclude, there are two aspects each investor must remember. First, when an investor sells his holdings partially, the accounting follows the FIFO– first in first out method. This means that if one sells 50 shares out of 100 shares accumulated over a long period of time, the average purchase price of the first 50 shares will be used to ascertain capital gains. These details are readily available in the back-end of the broking platform. Second, although there is an exemption up to Rs 1.25 lakh available for LTCG booked in a financial year, the same needs to be mentioned in the ITR filed. Filing ITR on time also lets investor carry forward her losses. We will discuss other benefits of ITR filing shortly. In the meantime, plan taxes wisely and enjoy the wealth creation journey.