Tax-loss harvesting in mutual funds

Tax-loss harvesting is the deliberate realisation of investment losses to offset gains, reducing the year's net taxable income. Indian mutual fund investors can do this each financial year — and the absence of a US-style "wash sale" rule actually makes it more flexible than in many other jurisdictions.

The set-off rules

Capital gains and losses are bucketed by type, and set-offs follow specific rules:

• Short-term losses can be set off against either short-term or long-term gains.
• Long-term losses can be set off against long-term gains only.
• Unutilised losses can be carried forward 8 years, subject to filing returns within the deadline.

A practical example

You realised ₹3 lakh equity LTCG this year. You also hold an underperforming debt fund position with ₹80,000 in unrealised long-term loss. Selling the debt position:

• Realises the ₹80,000 long-term loss.
• Sets off against the ₹3 lakh LTCG → taxable LTCG drops to ₹2.20 lakh.
• Saves ₹80,000 × 12.5% = ₹10,000 in tax.

You can immediately repurchase the same debt fund if you want to retain the exposure (Indian law has no wash-sale window).

Caveats

• Repurchase resets the cost basis and the holding-period clock — useful if you wanted to start a fresh accounting on the position anyway.
• Round-trip costs apply: STT on equity redemption (0.001%), exit load if within the load period, stamp duty (0.005%) on the buy.
• Don't sell purely to harvest a tiny loss — the transaction costs can outweigh the tax saving.

When to do it

Late February to early March, after you have a clear picture of the year's realised gains. Filing the loss in the return preserves the carry-forward right even if there's no current-year gain to offset.