Capital gains harvesting in India — the ₹1.25 lakh tax-free exemption you're wasting

Every Indian taxpayer gets a ₹1.25 lakh annual LTCG exemption on listed equity and equity mutual funds. Unlike 80C, it doesn't carry forward. Don't use it this year, it's gone. Most retail investors with long-running SIPs leave it on the table every single year, then complain about a ₹6 lakh LTCG tax bill at exit. Here's the harvesting strategy that fixes that.

The mechanics — what changed and what didn't

From Budget 2024-25 onwards:

• Equity LTCG rate: 12.5% (was 10%) on gains above ₹1.25 lakh/year (was ₹1 lakh)
• Equity STCG rate: 20% (was 15%) — no exemption
• Holding period for LTCG: 12 months for listed equity / equity MF — unchanged
• From Budget 2026-27: LTCL can no longer be set off against STCG. LTCL goes only against LTCG (per Section 74).

What is "harvesting" — in plain English

On the last working day of March each year, you check your equity / equity MF portfolio. Sell just enough units to book ₹1.25 lakh of long-term gain. Then immediately buy back the same units (or similar funds). Your portfolio looks identical the next day — but your tax-free gain is locked in.

The next time you sell those re-bought units at a profit, your cost basis is the higher (post-harvest) price. So the gain you eventually pay tax on is smaller. You've shifted ₹1.25L of growth into the tax-free bucket forever.

A 10-year SIP scenario — with and without harvesting

₹10,000/month SIP for 10 years in a flexi-cap mutual fund averaging 12% CAGR.

	No harvesting	Annual harvesting
Total invested	₹12,00,000	₹12,00,000
Corpus at year 10	₹23,23,000	₹23,23,000
Long-term gain at exit	₹11,23,000	~₹2,00,000 (rest already harvested)
Taxable gain (after ₹1.25L exemption in year 10)	₹9,98,000	₹75,000
LTCG tax @ 12.5%	₹1,24,750	₹9,375
Net saved	—	₹1,15,375

Same investments, same returns, but ₹1.15 lakh less tax — purely from spreading the gain over 10 annual exemption windows instead of taking it all in one year. Over a 25-year SIP, harvesting saves ₹3–5 lakh.

The harvesting checklist (March each year)

1. Pull your capital gains report for the financial year (every AMC / broker provides this)
2. Identify units held > 12 months with unrealised gain
3. Calculate units to sell such that realised LTCG ≈ ₹1.25 lakh
4. Sell those units. Wait for settlement (T+2 for stocks, T+1 for most MFs)
5. Re-buy the same / similar fund with the proceeds. Capture the new (higher) cost basis
6. Record the transaction in your FY tracker — you'll need it for ITR Schedule 112A

What about transaction costs?

• Direct mutual funds: zero exit load after 1 year for almost all equity funds. Free harvesting.
• Listed equities: brokerage + STT + DP charges. For a ₹3–5 lakh sell+buyback, costs are typically ₹400–1,200 total. Tax saved is ₹15,000+. Easy positive ROI.
• Stamp duty: 0.015% on buyback for equities — negligible (₹150 on ₹10L).
• STT: 0.1% on sell + 0.1% on buy (or 0.025% on intraday). After Budget 2026-27, delivery STT is 0.15%. Still negligible vs tax saved.

Loss harvesting — the other half of the strategy

Same principle, opposite direction. If you have loss-making holdings, sell them to book the loss in this FY. The loss can be set off against:

• Same-year capital gains (LTCG against LTCG; STCG against either LTCG or STCG)
• If unutilised, carried forward for 8 years (subject to filing ITR on time)

Important Budget 2026-27 change: LTCL (long-term capital loss) can no longer be set off against STCG (short-term capital gain). Section 74 rule restored. LTCL goes only against LTCG.

For most retail investors with limited losses, the practical impact is small. But if you have a losing crypto position or a delisted equity write-off, set it off against equity LTCG, not STCG.

When harvesting doesn't help

• Your total annual realised LTCG is already under ₹1.25 lakh from normal selling — no extra exemption to capture
• You're in the new tax regime with total income under ₹12 lakh — LTCG above ₹1.25L is still taxed at 12.5%, so harvesting still helps, but verify with full ITR calculation first
• Your SIP is < 12 months old — only LTCG (12+ months) gets the ₹1.25L exemption. Newer units sold = STCG = no exemption.
• You have an open intraday / F&O position on the same stock — separate STT calculation, talk to a CA first.

STCG harvesting — usually a trap

There's no exemption on STCG. Selling and re-buying within 12 months just locks in a 20% tax bill with no shield. The only legitimate STCG move is STCG loss harvesting — sell losers within 12 months to offset other STCG. Don't randomly book STCG profits "to use the slab" — equity STCG is taxed at flat 20%, not slab.

What about Section 54F reinvestment?

Section 54F allows you to invest the entire sale proceeds (not just gain) from long-term equity / shares into a residential house and claim full exemption. Useful for one-time big-ticket sales (selling startup ESOPs, inherited shares, etc.). For routine annual harvesting, 54F is overkill — the ₹1.25L exemption alone covers most situations.

FIFO vs specific identification — important

Indian tax law treats equity / equity MF sales on a First In First Out (FIFO) basis. So if you've been SIPping since 2020, the oldest units get sold first. This usually works in your favour — older units have the lowest cost basis and the highest gain, so you hit ₹1.25L exemption with the fewest units sold.

Your broker / AMC's gains report uses FIFO automatically. Don't try to "hand-pick" lots — Indian rules don't allow specific-lot identification for equity (unlike the US).

ITR reporting — Schedule 112A

When you file ITR, equity LTCG goes into Schedule 112A. Each transaction needs: ISIN, name, units, sale price, cost, sale date, purchase date. ITR-2 or ITR-3 supports this — ITR-1 doesn't, so if you've harvested, you can't use ITR-1.

Almost every broker / AMC provides a downloadable Schedule 112A statement these days. Just upload to the e-filing portal. Don't re-key thousands of entries by hand.

Run your numbers

Use our capital gains calculator to figure out how many units to sell to hit ₹1.25L LTCG, and the SIP calculator to project your post-harvest re-investment growth.

FAQs

Is harvesting legal? It feels like avoiding tax.

It's fully legal — it's using an exemption that the Income Tax Act explicitly gives you. The exemption resets every FY by design. You're not hiding anything; every transaction is reported to the IT department.

What if I sell and the market crashes the next day before I buy back?

Real risk. To minimise it: harvest on a relatively low-volatility day, use a market order at open or close, complete sell + buyback within the same session if possible. For MFs, the NAV at end of day is the same for both — no intraday gap.

Can I harvest in ELSS funds?

Only after the 3-year lock-in. Once a particular SIP unit clears 3 years, it's freely redeemable and qualifies for LTCG harvesting just like any equity MF.

Will harvesting trigger an audit?

No. Harvesting transactions look identical to ordinary trades to the IT department. Many institutional investors do this systematically. The exemption is a feature, not a loophole.

Should I harvest in NPS or PPF?

No need. NPS and PPF have their own tax treatment — no LTCG concept applies. The ₹1.25L harvesting strategy is specific to listed equity and equity mutual funds.

What about international stocks via LRS / GIFT City?

Foreign equity is treated as unlisted — LTCG threshold is 24 months and rate is 12.5% (post-2024) without the ₹1.25L exemption. The harvesting strategy doesn't apply. Indexation also doesn't apply post-Budget 2024.