Investing in the stock market can be highly rewarding, but it also comes with tax implications—especially when you book profits. What if there was a way to legally reduce your tax burden while staying invested in the market?

Enter Tax Loss Harvesting—a strategic approach where investors sell underperforming stocks at a loss to offset taxable gains from profitable investments. This technique doesn’t eliminate taxes entirely but helps in deferring them, improving cash flow, and optimizing your portfolio.

However, there’s a lot of confusion around this concept. Many investors believe it’s a tax-saving hack, while others dismiss it as ineffective. The truth? It’s a powerful tool if used correctly, but mistakes can lead to missed opportunities or even higher taxes in the long run.

What is Tax Loss Harvesting?

Tax loss harvesting is a strategy where investors sell underperforming investments at a loss to offset capital gains from profitable investments. This helps in reducing the overall tax liability.

Key Points:

• It is used to reduce short-term and long-term capital gains taxes.

• Losses from one investment can be used to offset gains from another.

• The primary goal is tax deferral, not complete tax avoidance.

How Does Tax Loss Harvesting Work? (With Examples)

Case 1: Short-Term Capital Gains (Mr. Raj’s Example)

Scenario:

• Mr. Raj invests ₹1 lakh each in Infosys and TCS.

• Infosys gives a profit of ₹50,000 (sold within a year).

• TCS shows a loss of ₹50,000 (still held).

Without Tax Loss Harvesting:

• Short-term capital gains tax (STCG) on ₹50,000 @ 20% = ₹10,000 tax.

With Tax Loss Harvesting:

• Mr. Raj sells TCS at a loss of ₹50,000 and immediately repurchases it.

• Now, the ₹50,000 loss from TCS offsets the ₹50,000 gain from FOS.

• Net taxable gain = ₹0 → No tax this year.

But what happens next year?

• If TCS rises to ₹5 lakh and is sold:

  • Cost of acquisition (after harvesting) = ₹50,000.

  • Profit = ₹4.5 lakh.

  • Tax @ 20% = ₹90,000 (deferred, not saved).

• Conclusion:

Tax is postponed, not eliminated.

Case 2: Long-Term Capital Gains (Mr. Shyam’s Example)

Scenario:

Mr. Shyam holds Infosys (₹1 lakh → ₹2.75 lakh, profit ₹1.75 lakh) and TCS (₹1 lakh → ₹50,000, loss ₹50,000).

Without Tax Loss Harvesting:

• LTCG on ₹1.75 lakh (after ₹1.25 lakh exemption) = ₹50,000 taxable.

Tax @ 12.5% = ₹6,250.

With Tax Loss Harvesting:

• Sells TCS at a loss of ₹50,000 and repurchases.

• Net gain = ₹1.75 lakh (FOS) – ₹50,000 (TCS) = ₹1.25 lakh.

• Taxable gain = ₹0 (due to exemption).

But if TCS later rises to ₹5 lakh:

• Profit = ₹4.5 lakh.

• After exemption, taxable gain = ₹3.25 lakh.

• Tax @ 12.5% = ₹40,625 (same as total tax without harvesting).

Conclusion:

Tax is deferred, not saved.

Advantages of Tax Loss Harvesting

✅ Tax Deferral – Postpones tax liability to future years.
✅ Better Cash Flow – Reduces immediate tax burden.
✅ Portfolio Rebalancing – Helps in adjusting investments without tax impact.

Disadvantages & Common Mistakes

❌ Not Actual Tax Savings – Only delays taxes; may lead to higher taxes later.
❌ Forced Selling – Investors may sell good stocks just for tax benefits.
❌ Wash Sale Rule (In India) – If repurchased within 30 days, loss may not be allowed (applies in some cases).
❌ Missing Growth Opportunities – Selling a stock too early may mean missing future gains.

Final Takeaways

Tax loss harvesting is useful but not a magic trick to avoid taxes.

Works best when planned strategically (not just before March 31).

Short-term vs. long-term gains must be considered carefully.

Always consult a tax advisor before executing this strategy.

Disclaimer: This article is for educational purposes only. Consult a financial advisor before making tax-related decisions.