Why Worked Examples Matter
Tax loss harvesting sounds simple in theory, but the real value becomes clear only when you run the numbers. Indian tax law has specific set-off rules, exemption thresholds, and rate differences that create different outcomes depending on the mix of gains and losses. A small change in whether a loss is short-term or long-term can mean the difference between saving Rs 20,000 and saving nothing.
The examples below use the current tax rates for listed equity shares: 20% for STCG under Section 111A, and 12.5% for LTCG above the Rs 1,25,000 exemption under Section 112A. All examples assume the investor is an individual taxpayer and that no other income-related provisions alter the capital gains tax calculation.
Each example walks through the set-off order step by step, showing exactly how much tax is owed before harvesting, how the harvest changes the calculation, and the final tax saved. These are representative of real scenarios that Indian stock market investors encounter every financial year.
Example 1: STCL Offsets STCG Directly
Scenario: Priya has realized Rs 1,00,000 in STCG from selling stocks held for less than 12 months. She also holds a stock currently showing an unrealized loss of Rs 60,000, also short-term.
Without harvesting: - STCG: Rs 1,00,000 - Tax at 20%: Rs 20,000 - Add 4% cess: Rs 800 - Total tax: Rs 20,800
With harvesting (she sells the loss-making stock): - STCG: Rs 1,00,000 - STCL: Rs 60,000 - Net STCG after set-off: Rs 40,000 - Tax at 20%: Rs 8,000 - Add 4% cess: Rs 320 - Total tax: Rs 8,320
Tax saved: Rs 20,800 - Rs 8,320 = Rs 12,480
This is the simplest and most common form of tax loss harvesting. STCL directly offsets STCG at the same 20% rate. Priya saves Rs 12,480 by selling a stock she was holding at a loss. Since India has no wash sale rule, she can repurchase the same stock immediately if she believes in its long-term potential.
Example 2: STCL Cross-Term Offset Eliminates LTCG Tax
Scenario: Rahul has realized Rs 1,50,000 in LTCG from selling stocks held for more than 12 months. He has no STCG. He holds a stock with an unrealized short-term loss of Rs 80,000.
Without harvesting: - LTCG: Rs 1,50,000 - Less exemption: Rs 1,25,000 - Taxable LTCG: Rs 25,000 - Tax at 12.5%: Rs 3,125 - Add 4% cess: Rs 125 - Total tax: Rs 3,250
With harvesting (he sells the loss-making stock): - LTCG: Rs 1,50,000 - STCL: Rs 80,000 (no STCG to offset first, so entire STCL offsets LTCG) - LTCG after set-off: Rs 70,000 - Less exemption: Rs 1,25,000 - Taxable LTCG: Rs 0 (Rs 70,000 is below the exemption) - Total tax: Rs 0
Tax saved: Rs 3,250
This example demonstrates the cross-term offset rule. STCL can offset LTCG after first being applied to any STCG. Here, Rahul had no STCG, so the full Rs 80,000 STCL reduces his LTCG. The reduced LTCG of Rs 70,000 falls entirely within the Rs 1,25,000 exemption, making his tax liability zero.
Example 3: Mixed Gains and Losses
Scenario: Anita has a complex tax situation with both short-term and long-term components.
Realized gains: - STCG: Rs 80,000 - LTCG: Rs 2,00,000
Unrealized losses available to harvest: - Stock A: Rs 1,20,000 STCL (held 4 months) - Stock B: Rs 50,000 LTCL (held 18 months)
Without harvesting: - STCG tax: Rs 80,000 x 20% = Rs 16,000 - LTCG taxable: Rs 2,00,000 - Rs 1,25,000 = Rs 75,000 - LTCG tax: Rs 75,000 x 12.5% = Rs 9,375 - Total tax before cess: Rs 25,375 - Cess at 4%: Rs 1,015 - Total tax: Rs 26,390
With harvesting (she sells both stocks): - Step 1: STCL Rs 1,20,000 offsets STCG Rs 80,000. Remaining STCL: Rs 40,000 - Step 2: Remaining STCL Rs 40,000 offsets LTCG. LTCG reduces from Rs 2,00,000 to Rs 1,60,000 - Step 3: LTCL Rs 50,000 offsets LTCG. LTCG reduces from Rs 1,60,000 to Rs 1,10,000 - Step 4: Apply Rs 1,25,000 LTCG exemption. Rs 1,10,000 is below exemption. - Net STCG: Rs 0. Net taxable LTCG: Rs 0. - Total tax: Rs 0
Tax saved: Rs 26,390. Anita goes from owing over Rs 26,000 to paying zero capital gains tax.
Example 4: LTCL Cannot Offset STCG
Scenario: Vikram has realized Rs 3,00,000 in STCG. He has no LTCG. He holds a stock with a long-term unrealized loss of Rs 1,50,000.
Without harvesting: - STCG: Rs 3,00,000 - Tax at 20%: Rs 60,000 - Add 4% cess: Rs 2,400 - Total tax: Rs 62,400
With harvesting (he sells the LT loss-making stock): - STCG: Rs 3,00,000 - LTCL: Rs 1,50,000 - Set-off: LTCL cannot offset STCG. The loss provides zero benefit this year. - Net STCG: Rs 3,00,000 (unchanged) - Tax at 20%: Rs 60,000 - Add 4% cess: Rs 2,400 - Total tax: Rs 62,400
Tax saved: Rs 0
This is a critical example that illustrates the asymmetry in Indian set-off rules. LTCL can only offset LTCG. Since Vikram has no LTCG, his Rs 1,50,000 LTCL provides zero tax benefit in the current year. If he still chooses to sell, the LTCL would be carried forward and could offset LTCG in future years, but only if he files his ITR on time. In most cases, selling just to create a carry-forward is not worthwhile unless there is a clear expectation of substantial LTCG in upcoming years.
Key Patterns Across These Examples
Several important patterns emerge from these examples that should guide your tax loss harvesting decisions:
Pattern 1: STCL is more valuable than LTCL. Because STCL can offset gains taxed at 20% (STCG) and gains taxed at 12.5% (LTCG), it provides more flexibility and often higher savings per rupee.
Pattern 2: The Rs 1,25,000 LTCG exemption is a powerful tool. In Example 2, the combination of loss harvesting and the exemption brought Rahul's tax to zero. Always factor in the exemption when calculating whether to harvest losses against LTCG.
Pattern 3: The set-off order matters. STCL is first applied to STCG, then to LTCG. You do not get to choose the order. This is automatic and prescribed by tax law. Understanding this order helps you predict the exact tax outcome.
Pattern 4: Harvesting LTCL without LTCG is usually pointless. As Example 4 showed, an LTCL with no LTCG to offset provides no current-year benefit. Do not sell a long-term holding at a loss unless you have LTCG to offset.
Pattern 5: The more types of gains and losses you have, the more important it is to calculate the exact impact before acting. Example 3 showed that a combination of STCL and LTCL can wipe out both STCG and LTCG entirely.
How to Calculate Your Own Tax Savings
To determine how much you would save from tax loss harvesting, follow this calculation framework:
Step 1: List all your realized STCG and LTCG for the current financial year. Your broker's consolidated tax P&L statement typically provides these figures.
Step 2: Identify all unrealized losses in your portfolio. Separate them into short-term (held less than 12 months) and long-term (held more than 12 months).
Step 3: Apply the set-off rules in order. First, apply STCL against STCG. Then apply remaining STCL against LTCG. Then apply LTCL against LTCG. Remember, LTCL cannot touch STCG.
Step 4: Calculate the tax on the net gains. Apply 20% to net STCG and 12.5% to net LTCG above Rs 1,25,000. Add 4% health and education cess on the total tax.
Step 5: Compare the tax with and without harvesting. The difference is your potential tax saving.
Tools like TaxHarvestLab automate this entire process. You upload your holdings data from Zerodha or other brokers, and the tool identifies optimal harvesting opportunities with exact savings calculations. This removes the manual effort and reduces the risk of calculation errors, especially when you have dozens of holdings with different purchase dates and costs.
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Analyze My Portfolio FreeFrequently Asked Questions
Can STCL offset LTCG in India?
Yes. After first being set off against any STCG, remaining STCL can offset LTCG. This cross-term offset is one of the most powerful features of Indian tax loss harvesting.
Does the Rs 1.25 lakh LTCG exemption apply before or after loss set-off?
The exemption applies after set-off. First, losses reduce your LTCG. Then the Rs 1,25,000 exemption is applied to whatever LTCG remains. This means loss harvesting and the exemption work together.
Can I harvest losses from mutual funds against stock gains?
Yes. Capital gains and losses from equity mutual funds and direct stock investments are treated under the same provisions. An STCL from selling a mutual fund can offset STCG from stocks.