Introduction

Investing in the stock market is a journey of highs and lows. While gains are the goal, losses are inevitable. But what if those losses could work in your favour? Tax loss harvesting is a strategic move that turns underperforming investments into opportunities to reduce your tax burden. For Indian investors, this technique is a powerful way to manage capital gains taxes while keeping your financial goals on track. At Motilal Oswal, we believe in empowering wealth creation—here’s how tax loss harvesting can help you do just that.

The Essence of Tax Loss Harvesting

Understanding Tax Loss Harvesting in its simplest terms, tax loss harvesting consists of selling an asset—whether a stock or a mutual fund—at a loss and applying that loss to reduce your taxable profit from capital gains from other investments. Since capital gains are taxed, this is a particularly useful strategy in India because it can help reduce your tax liability. Whether you’re a very active trader or a longer-term investor, it can also be a reasonably pragmatic way to benefit from the tax outcome after the value of an investment has decreased.

Let’s say you have gained a profit of ₹2,00,000 by selling a stock that you’ve held for less than a year—this is your short-term capital gain (STCG), and under Budget 2024 rules, it would be taxed at 20%, which means your tax will be ₹40,000. Now let’s assume you have another stock in your investment portfolio which has lost ₹1,00,000. By selling that stock, this loss is called “harvesting a loss,” Now we can reduce the current STCG tax calculation to ₹1,00,000, which means the tax is now only ₹20,000—saving you ₹20,000 in tax. This is a practical and legal approach to mixing gains and losses to your benefit.

Tax loss harvesting follows a simple process:

1. Identify Losers: Review your investment portfolio and identify which investments have decreased in value and are not likely to recover in the short term.

2. Sell to realise a loss: Now execute the sell order to realise a capital loss that will either be short-term (STCL) or long-term (LTCL).

3. Offset Your Gains: Use these losses to reduce taxable capital gains:

• STCL can offset both STCG and long-term capital gains (LTCG).
• LTCL can only offset LTCG.

4. Carry Forward Excess: If losses exceed gains, carry the remainder forward for up to 8 assessment years, provided you file your Income Tax Return (ITR) on time.

This method not only cuts taxes but also supports portfolio optimisation by letting you shed weak performers and reinvest smarter.

The Rules of the Game

India's tax legislation has prescribed parameters to facilitate losses to be offset against capital gains:

• Short-Term Capital Gains (STCG): Gains arising from the disposition of equity shares or equity mutual funds held for 12 months or less generally will be taxed at 20% (for transactions occurring on or after July 23, 2024, Budget 2024). Short-Term Capital Losses (STCL) can offset STCG and Long-Term Capital Gains (LTCG), providing flexibility.

• Long-Term Capital Gains (LTCG): Gains arising from the disposition of capital assets held for more than 12 months will be liable to tax at 12.5% on gains exceeding ₹1.25 lakh. Long-Term Capital Losses (LTCL) can only be used to offset LTCG. The first ₹1.25 lakh of LTCG is exempt from tax.

• Carry Forward: Unused losses can be carried forward indefinitely for up to 8 years, so long as you declare the losses in the Income Tax Return (ITR) for the year the loss is incurred.

When to Harvest Losses?

Timing is critical:

• After Gains: Offset profits from recent sales.

• Market Dips: Sell during downturns when losses are ripe.

• Year-End: Act before March 28, 2025, for FY 2024-25 (markets close March 29-31).

• Short-Term Gains: Prioritize STCG offsets due to the higher 20% rate.

Why Is It a Win-Win?

Beyond tax savings, tax loss harvesting offers:

• Lower Taxes: Reduce taxable capital gains immediately. 

• Future Flexibility: Carry forward losses for 8 years. 

• Portfolio Optimisation: Underperformers with high-potential assets that align with your goals. 

• Dual Offset: STCL’s versatility maximises savings. 

Conclusion

Tax loss harvesting is not about dwelling on losses; it is about recognising your losses and carrying them forward. Tax loss harvesting is a proactive way to lower taxes and adjust your portfolio. Whether you are adjusting STCG or LTCG, it helps you think smarter about investing. At Motilal Oswal, we think of tax loss harvesting as the broader strategy for efficiently building wealth. Talk to your advisor today about incorporating this into your portfolio.

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