Loss harvesting
In this chapter: STCL and LTCL — set-off and carry-forward rules · Wash-sale considerations
Capital losses can offset capital gains, reducing tax. STCL can offset both STCG and LTCG. LTCL can offset only LTCG. Unutilised losses carry forward up to 8 years. The mechanic: sell loss-making positions to crystallise loss; immediately re-invest in similar (but not identical) holding to maintain market exposure.
STCL set-off: against STCG first (same year), then LTCG (same year), then carry forward. LTCL set-off: against LTCG only (same year and carry forward). Worked example: ₹5L LTCG on equity + ₹3L LTCL on bonds = ₹2L net LTCG, taxed at 12.5% above ₹1.25L = ₹0 tax (or ₹9,375 if exemption already used). Wash-sale considerations: India has no formal wash-sale rule (unlike US 30-day disallowance), but selling and re-buying the SAME security purely for tax could be challenged as artificial. Better practice: sell Fund A, buy similar Fund B (different AMC, similar mandate) — same exposure, different security.
Practitioner techniques: at year-end, run a comprehensive loss-harvest review — identify all loss-making positions, sell those that align with portfolio strategy, replace with similar exposure. Don't harvest losses just for tax — only sell if the position no longer serves the IPS. Keep records of replacement-purchase rationale to defend if challenged. RIA-grade nuance: clients with substantial year-end LTCG often benefit from LTCL harvesting in equity (ETFs/funds) and matched buy-back; documentation must show non-tax purpose (rebalancing, fund-manager change, expense-ratio improvement).