Tax Loss Harvesting – Make the best of your portfolio losses

20 Mar 2025 , 12:24 PM

WHAT DO WE UNDERSTAND BY TAX LOSS HARVESTING

It often happens that the stocks you buy in your portfolio, may not always outperform. You may have chosen a bad stock or the markets may have crashed, so when the financial year is ending, you may have a rather anomalous situation. On one hand, you have booked capital gains when the market was booming till December 2024. Now, some of your holdings are sitting on a loss. What do you do? That is where tax harvesting comes in handy.

Differentiate the stocks you want to hold and the stocks you want to get rid of. Depending on your booked profits, sell loss making stocks, such that such losses can be written off against the gains. Remember, Short term capital losses (held for less than 1 year) can be written off against short term gains and long term gains. However, long term capital losses (held for more than 1 year) can only be written off against long term capital gains.

CALCULATING CAPITAL GAINS TAX WITHOUT TAX LOSS HARVESTING

To understand the impact of tax loss harvesting, let us first understand capital gains tax payable on actual profits booked during the financial year, as shown below for Investor-A.

Stock Name	Buy Date	Buy Price	Buy Qty	Buy Value	Sell Date	Sell Price	Sell Qty	Sell Value	Profit/ Loss	Gain Type
Alpha	11-07-21	33.50	10,000	3,35,000	11-09-24	71.00	10,000	7,10,000	3,75,000	LTCG
Beta	12-12-24	441.00	811	3,57,651	23-02-25	485.00	811	3,93,335	35,684	STCG
Gamma	21-01-25	921.50	220	2,02,730	04-03-25	995.00	220	2,18,900	16,170	STCG
Capital Gains									4,26,854

In the above case, Investor-A has already booked profits of ₹4,26,854 in FY25. While ₹3,75,000 is long term capital gains (LTCG), held for more than 1 year; the balance profits of ₹51,854 is short term capital gains (STCG), held for less than 1 year. The table captures how the calculation of capital gains tax will be done in the above case.

Particulars	Amount	Explanation
Long term capital gains Booked for FY25	₹3,75,000	Held for over 1 year
Less: Base annual LTCG Exemption	₹1,25,000	Under Income Tax Act
Taxable Long term capital gains	₹2,50,000
Long term capital gains tax Payable (A)	₹31,250	LTCG tax at 12.5% flat
Short Term Capital gains Booked for FY25	₹51,854	Held for less than 1 year
Tax on Short Tarm Capital Gains	₹10,371	20% base tax charged
Cess charged on tax paid	₹415	4% cess on base tax
Total STCG Tax payable (B)	₹10,786
Total Tax payable on LTCG and STCG	₹42,036	(A + B)

What do we gather from the above calculation? If the investor chooses to pay the full tax on the capital gains earned during the year, the total tax outgo will be ₹42,036 on the LTCG and the STCG combined.

HOW TO SAVE THIS TAX USING TAX LOSS HARVESTING

We now know that the total taxable capital gains (after exemption) for FY25 is ₹3,01,854 (LTCG + STCG), on which tax of ₹42,036 is payable overall. Is it possible to save this tax? Let us look at tax loss harvesting. In tax loss harvesting, you convert a book loss into actual loss. If you don’t want to hold the stock, you just let it go. If you want to hold the stock, then sell it, and buy it back in the next couple of days, so that price movement is not too much, but before the fiscal year ends. Let us assume that Investor-A has following losses on his books, which is not booked.

• Short term Book loss on Stock Theta = ₹-2,00,000 (STCL)
• Short term Book loss on Stock Omega = ₹-1,16,603 (STCL)

Since both the above are short term losses, then can be booked and, being short term losses, they can be written off against long term capital gains and short term capital gains. Here is how the calculation would look.

Particulars	Amount	Explanation
Total of Booked Gains (LTCG and STCG)	₹3,01,854	Combined booked taxable profit
Less: Short Term Loss on Theta	₹2,00,000	Loss booked, and stock bought back
Less: Short Term Loss on Omega	₹1,16,603	Loss booked, and stock bought back
Net loss carried forward	₹-14,749	This loss can be C/F for 8 years

In the above case, the notional book losses were converted into actual losses and were written off against the gains. This resulted in a net loss, that can be carried forward for set-off at any time in the next 8 years. More importantly, he pays zero capital gains tax this year, and since the shares are bought back, the portfolio almost remains intact.

PRACTICAL CONSIDERATIONS IN TAX LOSS HARVESTING

There are a few practical considerations in tax loss harvesting.

• First focus on saving your short term gains tax, since the rate of tax is higher and also there is no base exemption, unlike LTCG.
• Only buy back stocks you want to hold for the long term. You can also use tax loss harvesting to restructure the portfolio and exit the weaker stocks.
• Once you sell the stock, don’t buy it back the same day, as it would be treated as an intraday trade. Ideally do it on T+2 day, after the delivery is given out.
• Even if you have paid full advance tax by 15-March it is ok. You can claim the benefit of tax loss harvesting when you file returns and claim a refund.

Tax loss harvesting is a smart and legitimate method of reducing your tax outflow, without impacting your portfolio substantially.