Tax harvesting on mutual funds: ₹1.25 lakh tax-free a year

Every financial year, the first ₹1.25 L of long-term gains on equity shares and equity funds is tax-free.^[1] If you don't sell anything, that year's exemption is simply lost. Tax harvesting uses it: sell units with up to ₹1.25 L of gain before 31 March, and buy them straight back.

You stay invested, pay no tax, and the units' purchase price resets higher, so less of your gain is taxed when you finally sell.

How tax gain harvesting works

Say you hold equity fund units bought for ₹4 lakh, now worth ₹5.25 lakh: ₹1.25 lakh of long-term gain.

1. Sell them before 31 March. The ₹1.25 lakh gain is covered by the exemption: no tax.
2. Buy the same fund back the same day or the next.
3. Your new purchase price is ₹5.25 lakh, not ₹4 lakh. When you sell years later, the ₹1.25 lakh already harvested isn't taxed again.

Selling and buying back costs a little, about 0.1% in securities transaction tax and stamp duty, which the planner counts. Only units held over a year qualify, and sales take the oldest units first.

What it saves over the years

The longer you hold, the more years of exemption you collect:

Use the whole family's exemption

The exemption is per person. If your spouse or adult children hold equity funds in their own name, bought with their own money, each can harvest ₹1.25 L a year. With two members, the saving here grows by about ₹1.7 L.

Be careful with gifts: income from money you gift a spouse is usually taxed in your hands (clubbing). The extra exemption works cleanly for money that is genuinely theirs.

And tax loss harvesting?

The mirror image. If some investments are down, selling them books a capital loss you can set off against gains:

• Short-term losses can offset short-term or long-term gains.
• Long-term losses can offset only long-term gains.
• Unused losses carry forward for eight years, if you file your return on time.^[2]

Loss harvesting is most useful in a year when you've booked big gains elsewhere, say from selling shares or a property.

What this doesn't mean

• It's not a reason to trade. Harvesting is a once-a-year step that keeps you invested in the same funds.
• Check exit loads. Some funds charge for redeeming within a year; only harvest units past that.
• Rules can change. The exemption and rates here follow Budget 2024; check them each year.

The LTCG tax on SIP returns post shows how the tax builds up on a long SIP.

Equity at 12% a year; LTCG at 12.5% plus 4% cess above ₹1.25 L; harvest costs of 0.1%. For illustration only, not tax advice.