Tax loss harvesting is the practice of selling a security at a loss to reduce or offset the taxes you owe on capital gains. You can use it to lower your overall tax liability in a financial year.
Example
Here is how tax loss harvesting works in practice:
- You earn ₹1,00,000 in Short-Term Capital Gains (STCG) this year.
- At 20% tax, you owe ₹20,000.
- You hold stocks or mutual fund schemes with ₹80,000 in unrealised short-term losses.
- You sell those to bring your net STCG down to ₹20,000.
- You now pay 20% on ₹20,000, which is ₹4,000. Tax saved: ₹16,000.
How to use the tax loss harvesting opportunity on Console
You can see how much you can save on capital gains tax by visiting console.zerodha.com/reports/tax-loss-harvesting.
The page shows:
- How much can you save on capital gains tax for the current financial year
- Your short-term and long-term loss harvesting opportunity
- Your realised short-term gains (STCG), unrealised short-term losses (STCL), realised long-term gains (LTCG), and unrealised long-term losses (LTCL)
- The specific stocks and mutual fund schemes you can sell, along with the quantity and unrealised P&L for each
- The first ₹1,25,000 of long-term gains is tax-free each year and is already accounted for in the long-term loss harvesting opportunity
To understand taxation in depth, visit the Markets and Taxation module on Varsity by Zerodha.
Things to keep in mind
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Console calculates your buy average and profit and loss (P&L) using the First In First Out (FIFO) method. If you hold a stock with a short-term loss and a long-term profit, you must sell your entire holding to book the short-term capital loss - but this will also book the long-term capital gains on that stock.
- You will have no tax loss harvesting opportunity when you have no realised profits, or when your realised losses are greater than your realised profits.
- You will have no tax loss harvesting opportunity in the case of synchronised trades, reversal trades, or any trading activity outside the normal course of transactions.
- Verify your buy average and P&L before deciding to sell. It is best to take the help of a CA.
Regulatory note
India has no explicit regulation that disallows tax loss harvesting. However, in the US, tax authorities treat stocks sold and bought back within 30 days purely to offset gains as "wash sales" and disallow the tax offset.
Consult a Chartered Accountant (CA) before filing your income tax returns. If you sell and immediately repurchase the same stock to save on taxes, income tax authorities could question this during tax scrutiny.