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

Tax harvesting is a simple, legal way to use your ₹1.25 lakh annual equity LTCG exemption — so you pay less tax over your investing lifetime. Most investors let this exemption lapse unused year after year; harvesting is nothing more than deliberately claiming it.

How it works

Each financial year, equity LTCG up to ₹1.25 lakh is tax-free. If you've held units for over a year and have unrealised gains, you can:

• Sell enough units to realise about ₹1.25 lakh of long-term gains — paying zero tax.
• Buy back the same units soon after.

This "resets" your purchase price higher, so future gains are calculated from a higher base — shrinking the taxable gain when you eventually sell for real.

A worked example

Suppose you bought equity fund units for ₹8 lakh two years ago and they're now worth ₹9.25 lakh — an unrealised long-term gain of ₹1.25 lakh. You redeem the lot in March, pay zero tax (the gain sits exactly within the exemption), and reinvest ₹9.25 lakh in the same fund a few days later. Your cost basis is now ₹9.25 lakh instead of ₹8 lakh. Years later you sell everything at ₹15 lakh: your taxable long-term gain is ₹5.75 lakh instead of ₹7 lakh, saving 12.5% of the harvested ₹1.25 lakh — about ₹15,600. Repeat the exercise every year and the savings stack: a decade of diligent harvesting can shelter ₹12.5 lakh of gains entirely.

Things to watch

• Only worth it if you actually have long-term gains approaching ₹1.25 lakh that year — harvesting ₹30,000 of gains saves proportionally little.
• Mind any exit load — most equity funds charge ~1% if redeemed within a year, but harvested units are over a year old by definition; the repurchased units start a fresh exit-load and holding-period clock, though.
• The market can move in the gap between sell and buy-back — keep it short, and remember the buy-back happens at a different NAV.
• Do it before 31 March — the exemption doesn't carry forward. Many investors calendar it for February–March.
• Your SIP keeps running normally; harvesting is a separate, once-a-year action on old units.

What harvesting is not

It doesn't improve your fund's returns, and it isn't a reason to churn a portfolio — it's purely a tax-basis reset using an exemption the law grants you annually. Keep fund selection decisions (which fund, how much) entirely separate from the harvesting mechanics, and don't let the tax tail wag the investment dog. Mutual fund investments remain subject to market risks throughout.

→ Track your holdings and unrealised gains in your Portfolio, and read the full picture in how mutual funds are taxed. (General information, not tax advice.)