Tax-loss harvesting means deliberately selling a losing holding to book the loss on paper, so it can be set off against gains you have already booked, reducing the taxable gain, and therefore the tax, for the year. The loss was always there in your portfolio; harvesting simply turns it from an unrealised number into one the tax computation can use.
How does booking a loss reduce my tax?
Tax is charged on realised gains, profits from things you actually sold. An unrealised loss, however painful on screen, does nothing to your tax bill until you sell.
Walk through Sunita's year. By February she has sold some winners and booked short-term capital gains of ₹1,20,000. She also still holds shares of Malwa Sugars sitting at an unrealised loss of ₹40,000. If she does nothing, she pays tax on the full ₹1,20,000 at whatever rate currently applies to short-term gains.
Instead, before 31 March she sells the Malwa Sugars shares and books the ₹40,000 loss. Her net taxable short-term gain drops to ₹80,000, and the tax (at that same rate, whatever it is) is now charged on ₹80,000 instead of ₹1,20,000. The loss just paid for part of her tax bill. If she still believes in the stock, she can buy it back afterwards; nothing forbids that in India today, though the repurchase happens at market price and restarts her holding period.
Can any loss offset any gain?
No, and this is where harvesting plans go wrong. Set-off runs on rules, and the broad shape is:
| This loss… | …can offset |
|---|---|
| Short-term capital loss | Short-term and long-term capital gains |
| Long-term capital loss | Long-term capital gains only |
| Speculative (intraday) loss | Speculative profits only |
So a short-term loss is the more flexible tool, while a long-term loss cannot touch short-term gains. Capital losses cannot offset salary, and intraday losses live in their own compartment entirely. What "short-term" and "long-term" mean here (the holding periods and the rates attached) is covered in what short-term and long-term capital gains are; the exact boundaries change, so verify the current position when you plan.
Losses you cannot use this year are not wasted: filed in an on-time return, they carry forward for a limited number of years (currently eight for capital losses) to offset future gains.
When do people actually do this?
Usually in February and March, before the financial year closes on 31 March. Investors review the year's booked gains in their P&L statement, spot holdings in the red, and decide whether booking any of those losses makes sense. The sale must genuinely settle within the financial year to count for it.
The judgement call is never purely about tax. Selling a sound company just to harvest ₹5,000 of loss, paying transaction costs both ways and risking the price running up before you re-enter, can cost more than it saves.
Things to keep in mind
- Harvesting only helps if you have taxable gains to offset, a loss booked into a gain-free year merely carries forward.
- Match the loss type to the gain type; the set-off matrix above is the whole game, and its details should be verified before you act.
- Repurchasing after harvesting resets your holding period and exposes you to the price moving while you are out.
- This is an educational walkthrough, not advice, for your own numbers, consult a tax professional.
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