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Module 2.8CFP RTPSFull chapter

Tax-loss harvesting and structuring

In this chapter: STCL, LTCL set-off and carry-forward · Year-end planning workflow

~6 min readLayer 4 · Professional CertificationsFree

Tax-loss harvesting realises losses to offset gains, reducing tax. It's a legitimate, professional technique — used systematically by HNW investors and increasingly by sophisticated retail. CFPs add value of 50-200 bps annually through disciplined harvesting.

Foundation

Indian rules: • STCL set-off: first against STCG (same year), then LTCG, then carry forward • LTCL set-off: only against LTCG (same year and carry forward 8 years) • Carry forward conditions: must report loss in year incurred; file ITR-2 or higher; ITR-1 cannot carry forward losses Wash-sale equivalents: India has no formal rule against selling and re-buying the same security. But tax authorities can challenge transactions purely for tax purposes. Better: sell Fund A, buy Fund B (different AMC, similar mandate). Document non-tax rationale. Workflow: end-of-Q3 preview (Dec-Jan), identify losses to harvest, execute by mid-March to allow settlement.

Deep Dive

STCL vs LTCL nuances: STCL flexibility: can offset both STCG and LTCG. So short-term losses are versatile. LTCL restriction: only LTCG (current and carry forward). Long-term losses are less flexible. Replacement strategy: • Sell losing position • Buy similar but different position (different AMC, same mandate) • Document the non-tax rationale: "switching to lower expense ratio fund", "switching to better-performing manager", etc. Timing windows: • March 31 deadline for current-year offset • Settlement: T+1 for equity, so trade by ~March 25 to ensure settled • For real estate: gain realisation timing requires 30-60 days advance planning

Advanced

CFP-level workflow: 1. End of Q3 (Dec-Jan): pull client's portfolio statement. 2. Identify positions at gain (would realise STCG/LTCG if sold). 3. Identify positions at loss (potential to harvest). 4. Calculate tax impact: with vs without harvest. 5. Plan execution: sell losses, replace with similar funds, by mid-March. 6. Document: client agreement, rationale, replacement choice. 7. File ITR-2 for the year showing the harvested loss. For HNW clients with multiple goals: • Equity portfolio: regular harvest opportunity (volatile asset class) • Real estate: large discrete event; Section 54/54F exemptions consideration • International equity (now debt for tax): potential losses can offset salary income Watch for "loss-laundering": selling and re-buying the SAME security in family member's names to recreate the position. Tax authorities are increasingly flagging this. The clean approach: similar-but-different replacement, fully documented. Balance harvesting with capital deployment goals — don't harvest just for tax savings if it creates re-entry risk in choppy market.

Regulatory references
  • Income Tax Act Sections 70-80 (loss set-off and carry-forward)
  • Section 54 (residential property exemption)
  • Section 54F (general property exemption)
  • Section 54EC (REC/NHAI bond reinvestment)
  • Capital Gains Account Scheme rules
Common mistakes & pitfalls
  • Realising loss but not filing ITR-2 — loses carry-forward.
  • Selling and re-buying SAME fund within days — could be challenged.
  • Forgetting Section 54/54F exemptions on real-estate sales.
  • Crystalising loss late in March — settlement issues.
  • Replacing with very different asset — defeats market-exposure continuity.

Frequently asked

Can I harvest losses every year?
Yes, if you have losses to harvest. CFPs typically run an annual end-of-year harvest review. Some clients have consistent harvest opportunities; others have rare ones. Don't force harvest if losses don't exist.
Is loss harvesting legal?
Yes, fully legal in India. The Income Tax Act explicitly provides for loss carry-forward and set-off. The legitimate technique is: sell losing position, replace with similar-but-different security to maintain exposure, document the rationale.
What if I want to re-buy the same fund?
Wait at least 31 days before re-buying the same fund. This avoids any potential anti-avoidance challenge. Better: replace with a different fund from a different AMC with similar mandate.

Practice questions

Click each question to reveal the answer and explanation.

Q 1
STCL on equity can be set off against:
  1. (a)Only STCG
  2. (b)Only LTCG
  3. (c)Both STCG and LTCG (same year)
  4. (d)Other heads of income
Correct: (c) Both STCG and LTCG (same year)
STCL offsets both STCG and LTCG (same year). LTCL offsets only LTCG. Both can carry forward 8 years if not fully used.
Q 2
Loss carry-forward period in India is:
  1. (a)3 years
  2. (b)5 years
  3. (c)8 years
  4. (d)Indefinite
Correct: (c) 8 years
8 years carry-forward for both STCL and LTCL. Must report loss in the year incurred via ITR-2 or higher. ITR-1 cannot carry forward losses.
Q 3
Section 54 LTCG exemption applies to:
  1. (a)Sale of any asset
  2. (b)Sale of residential property reinvested in another residential property
  3. (c)Sale of equity reinvested in real estate
  4. (d)Sale of jewellery
Correct: (b) Sale of residential property reinvested in another residential property
Section 54: capital gains on sale of residential house, exempt if reinvested in another residential property within 2 years (purchase) or 3 years (construction). Most-used real-estate exemption in India.
Q 4
For loss harvesting, replacement strategy is:
  1. (a)Buy back same fund within 7 days
  2. (b)Sell and buy similar but different fund (different AMC)
  3. (c)Hold cash
  4. (d)Buy safe FD
Correct: (b) Sell and buy similar but different fund (different AMC)
Replacement: sell losing fund, buy a different fund with similar mandate from different AMC. Maintains market exposure while capturing tax loss. Document non-tax rationale.
Q 5
Loss harvesting must be executed by:
  1. (a)June 30
  2. (b)March 31 of fiscal year
  3. (c)December 31
  4. (d)Anytime
Correct: (b) March 31 of fiscal year
Indian fiscal year ends March 31. Loss must be realised by this date to claim against current-year gains (or carry forward). Allow settlement time; trade by ~March 25.
Educational purposes only. The numbers, returns, and examples used in this lesson are illustrative. Past performance does not guarantee future results. Mutual fund and securities investments are subject to market risks. This lesson is not investment advice; for advice tailored to your circumstances, consult a SEBI-registered Investment Adviser. Read our full disclaimer.