Selling shares, mutual fund units or other investments at a price lower than the purchase price, so that the loss is booked and can be set off against capital gains of the same year, or carried forward to later years, to reduce the tax payable on those gains.
Tax loss harvesting is a market term, and it is not defined by SEBI is the statutory regulator of India's securities market, with the legal duty to protect investors and to promote and regulate that market. Read the full meaning of SEBI, the RBI, the stock exchanges, the Association of Mutual Funds in India (AMFI) or the Income Tax Department. The concept is rooted in the set‑off and carry‑forward provisions of the tax law and it is fully legal under those rules.
The loss gets booked only when the investment is actually sold.
Set-off and carry-forward rules
A short term loss can be set off against any capital gain, while a long term loss can be set off only against long term gains.
Equity short term capital gains (STCG) are taxed at 20%, and equity long term capital gains (LTCG is the profit from selling an asset such as shares, mutual fund units or property after holding it beyond the qualifying period. Read the full meaning of LTCG) at 12.5% on the amount above Rs 1.25 lakh a year. For an individual with a short term loss and short term gains of Rs 1 lakh each, there will be a tax saving of around Rs 20,000. The same loss set off against long term gains will save around Rs 12,500, before cess.
A net loss left unused can be carried forward for 8 assessment years, but only when the income tax return has been filed by the due date under Section 139(1) of the Income-tax Act, 1961.
The Income Tax Act, 2025 keeps the same logic, with the set-off and carry-forward rules given new section numbers.
Why it matters and one common confusion
At these tax rates, a booked loss reduces the tax payable by investors who have gains in the same year. Harvesting is usually done before 31 March, the end of the financial year.
A holding that shows a loss on paper is not a harvested loss until the sale is made. A long term loss cannot absorb short term gains, so a short term loss is the more flexible type.
Indian tax law has no specific wash sale rule, so a seller can buy the same investment again.
Capital losses cannot offset salary or any income other than capital gains.