Losing Money on Purpose: The Legal Art of Tax-Loss Harvesting

Arjun made Rs. 3.2 lakh profit on HDFC shares and Rs. 1.8 lakh loss on his IPO allocations sitting at half their issue price. Standard approach: hold both, pay LTCG on the profit, stare sadly at the losers. Smarter approach: sell the losers before 31 March, offset the gain, re-buy after the same-scrip cooling period. Net tax saved: Rs. 22,500. This is a decision the Indian tax code actively rewards; unlike the US, there is no wash-sale rule to stop you. It just needs a disciplined March checklist.

By the end, you will know the exact mechanics of equity tax-loss harvesting in India. What offsets what, the carry-forward rules, the filing-by-31-July safeguard, and the SEBI behaviour that makes "wash sales" not-a-concept here.

Read this first

Capital gains basics

The offset rules

STCL (short-term capital loss) offsets STCG + LTCG. The most versatile loss bucket.
LTCL (long-term capital loss) offsets LTCG only. Cannot absorb STCG (post-Budget 2018 amendment).
Losses that cannot be absorbed in current year carry forward 8 years under section 74.

The STCL asymmetry is strategic: if you have unrealised losses in both buckets and some gains to offset, crystallise the STCL first. It is more flexible. Save the LTCL for years when you have LTCG to pair it with. Many investors invert this and burn through the more-useful short-term losses against long-term gains, leaving the rigid LTCL to expire.

Execution. The March checklist

Before 31 March, review every position in your demat. For any position at a loss that you were going to hold anyway, sell to crystallise the loss, then buy back. India has no "wash sale" rule. No 30-day blackout like the US IRS enforces. The caveat: keep the sale and repurchase at arm's length (use separate trading sessions, preferably separate days, not back-to-back same-second trades that a scrutiny might treat as sham). A day gap in a cash-delivery trade is sufficient defensive posture.

Watch out for one subtle trap: section 94(8). Bonus stripping. If you buy a share within 3 months before a bonus issue and sell within 9 months after, the loss is disallowed on the original shares and carries to the bonus shares' cost basis. This anti-abuse rule does not cover regular loss harvesting; it is narrow. But it is why genuine loss harvesting across a year is safe while manufactured bonus-strip trades get punished.

Worked example. Arjun's trades

March 2026: Arjun has Rs. 3.2L realised STCG from HDFC sale (20% = Rs. 64,000 tax). Sitting losses: Paytm Rs. 1.2L, Delhivery Rs. 60k (both bought > 1 year ago to LTCL). If he sells both before 31 March: LTCL Rs. 1.8L to offsets against future LTCG (not current STCG, per rule). If he instead realises STCL of Rs. 1.8L by selling short-term losers: Rs. 3.2L STCG - Rs. 1.8L STCL = Rs. 1.4L taxable to Rs. 28,000 tax. Saved Rs. 36,000 in current year.

Carry-forward and ITR filing discipline

Losses claimed under section 74 require ITR filing BY THE ORIGINAL DUE DATE (31 July for non-audit cases). A belated return under section 139(4) does NOT preserve capital loss carry-forward. This is one of the biggest hidden costs of late filing. The 8-year window is fiscal-year based: loss crystallised in FY 2025-26 expires 31 March 2034 if unutilised. Carry forward year-on-year in your ITR schedule CG.

LTCL on equity vs LTCL on property. Not interchangeable

Long-term loss on listed equity can offset long-term gain from any asset class (property, gold, equity). But a long-term loss on property can only offset long-term gain from land/building. Not equity. The asymmetry protects equity LTCG rates from being wiped out by real-estate writedowns.

F&O loss is business loss, broader offset

F&O net loss is non-speculative business loss under section 43(5) proviso(d). It offsets ANY head of income (except salary) for 8 years. A different and often more useful bucket than capital-loss carry-forward. Declare properly in ITR-3.

Intraday speculative loss. 4 years only

Intraday cash-equity loss is speculative business loss. Carry-forward is 4 years under section 73, and only against speculative gains. Much narrower than both capital losses (8 years) and F&O business losses (8 years, broad).

Key Takeaways

STCL offsets STCG + LTCG. LTCL offsets LTCG only.
Unused loss carries forward 8 years via section 74. ONLY if ITR filed by due date.
India has no wash-sale rule; you can re-buy immediately (use separate trading sessions to stay clean).
F&O loss is business loss with a broader offset scope. Even wider than capital losses.
Belated filing kills capital-loss carry-forward. File by 31 July if you have losses to preserve.