Tax Harvesting 101: The ₹12,500 Free Lunch
The Indian Government allows you to book ₹1.25 Lakh of Long Term Capital Gains (LTCG) absolutely tax-free every year. If you don't use it, it lapses. This guide teaches you how to 'Harvest' this gain and reduce your future tax bill legally.
Imagine the Income Tax Department walking up to you and handing you a cheque for ₹15,625 every March. Would you take it? Or would you say "No thanks, I'm too lazy"?
Most investors say "No thanks".Tax Harvesting is the simple act of selling your mutual funds to book profits and buying them back immediately. By doing this, you reset your buying price and legally pay zero tax.
The Golden Rule
"Long Term Capital Gains (LTCG) up to ₹1.25 Lakh per financial year are exempt from tax."
Note: The budget increased this limit from ₹1 Lakh to ₹1.25 Lakh in July 2024. If you have ₹1.25 Lakh profit, and you sell, you pay ₹0 tax. But if you DON'T sell, this allowance lapses. You cannot carry it forward to next year.
The Magic Trick
The goal is to increase your "Cost of Acquisition" (Buy Price). When your Buy Price is higher, your future profit looks smaller to the taxman, so you pay less tax later.
Lazy vs Smart Investor
| Metric | Lazy Investor (Hold) | Smart Harvester | Result |
|---|---|---|---|
| Scenario | Lazy Investor (Hold) | Smart Harvester (Sell & Buy) | Benefit |
| Initial Investment | ₹5,00,000 | ₹5,00,000 | - |
| Value After 1 Year | ₹6,25,000 | ₹6,25,000 | Profit: ₹1.25 Lakh |
| Action | Do Nothing | Sell & Buy Back | Reset Base Price |
| Tax Liability on ₹1.25L | Deferred (Pending) | ₹0 (Exempt Limit) | Tax Saved! |
| New Buy Price | ₹5,00,000 | ₹6,25,000 | Higher Base = Lower Future Tax |
The Result: The Smart Harvester has increased their "Base Price" to ₹6.25 Lakh. When they sell 5 years later for ₹10 Lakh, their taxable profit will be calculated from ₹6.25 Lakh, not ₹5 Lakh. They effectively killed ₹1.25 Lakh of taxable profit forever.
How to Harvest in 5 Minutes
- Login to your Broker (Zerodha/Groww/Kuvera).
- Check Holdings: Look for funds held for > 1 Year (Long Term).
- Identify Gains: Find units where profit is roughly ₹1.25 Lakh.
- Sell: Place a redemption order. (Money hits bank in T+2 days).
- Buy Back: As soon as money hits bank, invest it back into the SAME fund.
PRO TIP: If you have extra cash in savings, Buy Back on T+0 (Same Day) using your savings, and replenish savings when redemption money comes (T+2). This prevents you from missing 2 days of market movement.
Do NOT make these mistakes
- 🚫Don't Harvest Short Term Gains (STCG):
Only sell units older than 1 year (Equity). If you sell units < 1 year, you pay flat 20% tax.
- 🚫Don't Ignore Exit Loads:
Check if your fund has an Exit Load (usually 1% if sold within 1 year). Since harvesting strictly applies to fund > 1 year, exit load is usually zero, but check anyway.
- 🚫Don't wait till March 31st:
Markets are closed on weekends/holidays. Funds take time to settle. Do it by March 20th.
A Penny Saved is a Penny Earned.
Saving ₹12,500 tax is equal to earning ₹18,000 pre-tax salary. It takes 10 minutes once a year. Put a reminder on your calendar for March 15th.
Join the "KnowYourFinance" Community
Get daily financial nuggets, market alerts, and direct answers to your queries. No spam. Only wealth-building alpha.
Join 2,000+ Investors on WhatsAppTags
Ready to Put This Knowledge into Action?
Download KnowYourFinance app and access 25+ calculators, enhanced planners, and personalized insights to implement what you've learned.
Download Free AppRelated Articles
Continue your financial education with these related guides
