harvesting trick before March 31 to save up to Rs 15,625 by churning Rs 1.25 lakh of LTCG in your equity investments

Synopsis

Equity investors can save income tax on long-term capital gains. A strategy called tax-harvesting involves selling equity investments before March 31, 2026. This allows investors to book gains up to Rs 1.25 lakh tax-free each financial year. After booking profits, investors can repurchase the same assets to remain invested.

Equity investors who wish to save good amount of income tax on long term capital gains by selling equities or equity oriented mutual funds can use a method called tax-harvesting. This method is a two-step process. First, you sell the particular asset (equity shares, equity mutual funds) preferably on or just before March 31, 2026 and then buy the same asset within a short period with aim of avoiding or minimising market movement related loss. The maximum amount of LTCG that you can make tax free using this method is Rs 1.25 lakh. This is because LTCG from equity shares and equity mutual funds is tax exempt if the gain is up to Rs 1.25 lakh after which all long-term gains are taxed at 12.5%. The maximum tax saving through this method could be Rs 15,625 which is 12.5% of Rs 1.25 lakh of LTCG.

Investing long-term capital gains of up to Rs 1.25 lakh earned from stocks or mutual funds in a financial year is a tax-harvesting exercise that investors can use to save a substantial amount of tax in the long run. As the financial year 25-26 is set to close on March 31, 2026, you may also use this tactic to reduce your tax liability.

TaxBuddy in a tweet has highlighted how you can save income tax by reinvesting LTCG of up to Rs 1.25 lakh every financial year.

Tax-free LTCG of up to Rs 1.25 lakh in a financial year

Abhishek Soni, founder and CEO, Tax2Win, told ET Wealth Online that LTCG from equity shares and equity mutual funds are tax-free up to Rs 1.25 lakh in a financial year. An investor can take advantage of this by selling some of their investments that have been held for more than one year and have gains.

“If the total LTCG booked during the year is up to Rs 1.25 lakh, no tax is payable on that gain. After selling, the investor can invest that money again if they want to remain invested in the market,” says Soni.

TaxBuddy explains the tax-harvesting strategy in the following way-

Equity capital gains tax rules

Investment type

Holding period

Tax treatment

Equity shares / Equity mutual funds (LTCG)

More than 12 months

Rs 1.25 lakh exemption per financial year; gains above Rs 1.25 lakh taxed at 12.5%

Equity shares / Equity mutual funds (STCG with STT)

12 months or less

Taxed at 20% under Section 111A

Tax gain harvesting strategy

Action

What it means

Sell long-term equity investments

Book profits on equity investments held for more than 12 months

Use LTCG exemption

Realise gains up to Rs 1.25 lakh in a financial year

Zero tax on that portion

No tax is payable on gains up to Rs 1.25 lakh

Reinvest proceeds

Reinvest the money to stay invested in the market

Higher purchase price

New higher cost price reduces future taxable capital gains

Tax loss harvesting strategy

Action

What it means

Sell loss-making investment

Realise capital losses on investments

Offset gains

Use losses to reduce taxable capital gains

Carry forward losses

Losses can be carried forward for up to 8 assessment years

Filing requirement

ITR must be filed before the deadline to carry forward losses

Capital loss set-off rules

Loss type

Can be set off against

Long-term capital loss

Only long-term capital gains

Short-term capital loss

Both short-term and long-term capital gains

Which shares/units of mutual funds can be redeemed to invest LTCG

Soni says, first, the investor needs to review their portfolio and identify equity shares or equity mutual funds that have been held for more than one year.

Next, calculate LTCG on these investments.

Then redeem or sell only that portion of units where the total long-term gain realised during the financial year comes to around Rs 1.25 lakh.

Does an investor need to invest LTCG in the same or different mutual fund(s)?

Once the gain is booked, it will be tax-free because it is within the exemption limit. If the investor wants to continue investing, they can reinvest money in the same fund or another investment.

You need to redeem investment before March 31

Investors should place the redemption request before March 31 within the applicable cut-off time to ensure the transaction is processed within the current financial year, explains Soni.

This is because mutual fund transactions follow cut-off timings and settlement cycles. Once the redemption is completed and the amount is received, the investor can reinvest it again if they wish to stay invested.

You can’t ignore market risks

There may be a gap of few days when you redeem your investments and when you reinvest your LTCG. In that duration, the market can rise or fall sharply (the current market fall is example when the Nifty 50 index fell considerably within a week).

If the market rises, the investor may have to buy at a higher price, explains Soni, adding if the market falls further after reinvesting, the value of the investment may decline.

Exit load and STT are also important factors

Investors should also consider factors such as exit load and securities transaction tax (STT). Because of these risks, investors should use this strategy mainly for tax planning and not rely on market timing, advises Soni.

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