Tax harvesting: use your ₹1.25 lakh of tax-free gains every year

How the exemption works

• Shares and equity fund units held more than 12 months give long-term gains, taxed at 12.5% on the part above ₹1.25 lakh in a financial year, plus 4% cess.
• Sold within 12 months, the gain is short-term and taxed at 20%, with no exemption.
• The ₹1.25 lakh covers your long-term gains from shares and equity funds together, and only in the year you sell.
• It applies only where STT is paid on the sale (and, for shares, usually on the purchase too). Debt funds bought from 1 April 2023 are taxed at your slab rate instead.

So if you hold equity investments for years and sell them all at once, you use the exemption only once. Harvesting uses it every year.

How to harvest, step by step

1. Near the end of the financial year, download your capital gains statement from your fund house, broker or registrar (CAMS or KFintech).
2. Add up the long-term gains you have already booked this year. Your room is ₹1.25 lakh minus that.
3. Sell units that have been held more than 12 months, enough to book gains up to that room.
4. Buy back the same fund or shares with the money, so you stay invested.
5. Keep the statements: the new purchase price is your cost from now on.

What it saves: ₹10 lakh over 10 years

₹10 lakh in an equity fund growing 12% a year is worth ₹31.06 lakh after 10 years. Compare selling everything at the end with harvesting gains every year for the first 9 years.

Even one harvest helps. Booking ₹1.2 lakh of gains tax-free this year cuts the tax on your eventual sale by up to ₹15,600 (12.5% plus cess on ₹1.2 lakh).

Try it on your own gains

The catches

• The 12-month clock restarts. The units you buy back are new; sell them within a year and the gain is short-term at 20%.
• ELSS lock-in restarts too. Bought-back ELSS units are locked in for another 3 years.
• Check the exit load. Some funds charge one if you sell within a set period; read your fund’s terms before selling.
• Selling costs a little. STT on selling equity fund units is 0.001% (₹5 on ₹5 lakh). For shares it is 0.1% on both the sale and the purchase (₹1,000 on a ₹5 lakh round trip), plus brokerage and depository charges.
• You may be out of the market for a few days between selling and buying back. Prices can move either way.
• Old holdings. For shares and units bought before 1 February 2018, the cost is the higher of what you paid and the lower of the 31 January 2018 price and the sale price. After you harvest, the new purchase price replaces that.
• The ₹12 lakh rebate does not cover these gains. In the new regime, tax on long-term gains above ₹1.25 lakh is payable even if your other income is under ₹12 lakh.