New DelhiThe habits of Indian investors have changed rapidly in the last few years, Whereas earlier most people used to invest money in fixed deposits or traditional savings schemes, now especially among Gen Z and Millennial investors, the inclination towards equities, mutual funds and ETFs has increased, The direct reason for this is the expectation of better returns and easy investment due to digital platforms,
But as investment increases, it also becomes important to understand the tax imposed on investment. Many new investors are not aware that there are different types of taxes on profits from equity and mutual funds. These are called long-term and short-term capital gains taxes. It is important to understand these because selling at the wrong time reduces your returns. Meanwhile, a strategy is becoming increasingly popular which investors are using on a large scale in 2025. Its name is tax harvesting. This is a completely legal and intelligent way by which investors can save tax without any additional risk.
What is tax harvesting?
Tax harvesting is a strategy in which you realize that part of your investment profit every financial year which falls within the tax free limit. This limit under Indian tax laws is currently Rs 1 lakh. That is, if the long term profit from your equity shares or equity mutual fund is up to Rs 1 lakh in a year, then no tax has to be paid on it. If your profit from cost price exceeds Rs 1 lakh, then ten percent tax will be levied on that additional amount.
The method of tax harvesting is that every year you sell so much investment that your profit comes to exactly around one lakh rupees. Then immediately buy the same unit or share again. This resets the purchase price of your investment and in future, when the investment grows further, the tax will be less. This is the specialty of this strategy.
Why has the need for tax harvesting increased?
The first reason is that the Indian stock market is continuously reaching new high levels. Huge unrealized profits have accumulated in the portfolios of many investors. If they sell everything at once without a strategy, it will result in huge tax liability.
The second reason is SIP investment. Every month crores of people in India do SIP in mutual funds. Over time, small benefits accumulate on these SIPs. At the end of the year, when big profits are seen, investors get scared that now there will be tax on selling. Tax harvesting can systematically make these gains tax free.
The third reason is the increase in the number of taxpayers due to increase in income. As people are moving into higher tax brackets, the need for tax savings has also increased. Tax harvesting is an effective way to meet this need.
A Simple Example of How Tax Harvesting Works
Suppose you invested Rs 5 lakh in an equity mutual fund in 2021. In 2025 it will increase to seven lakh fifty thousand rupees. Your total profit is two lakh fifty thousand rupees. If you sell this entire investment together then the first one lakh will be tax free but the remaining one lakh fifty thousand will be taxed at 10 percent.
Now consider the same situation with tax harvesting. You sell only that many units which make your profit exactly Rs 1 lakh. That’s it. Buy the same unit again immediately after selling. This will make the new cost of your investment the same NAV as it was at the time of repurchase. Beyond this, further benefits will be less taxable. And you can repeat this process every year.
Five big benefits of tax harvesting
The first advantage is that future tax liability is reduced. Every year the taxable profit decreases as costs increase. The second advantage is that real earnings after tax increase. The third advantage is that SIP investors get complete control. The fourth advantage is that it does not change the portfolio allocation because you buy the same investments. The fifth advantage is that this is a completely legal method and does not violate any rules.
Tax loss harvesting doubles profits
If some of your investments are in loss then you can set off the gains from the profitable investments by selling them. This is called tax loss harvesting. That means your total tax liability reduces by including loss and profit. Both the strategies together make your portfolio tax efficient.
avoid these mistakes
The first mistake is that people rush in the last week of March. Due to this the wrong unit is sold. The second mistake is not checking the exit load. Some mutual funds charge a fee for selling within a year. The third mistake is to sell short-term profits by mistake, which attracts fifteen percent tax. Therefore always ensure that the unit is at least twelve months old.
Which investors should do tax harvesting
Long-term equity investors, SIP investors, investors in higher tax brackets, young professionals and retired investors can make huge gains by adopting this strategy. Overall, tax harvesting is beneficial for you if you have unrealized gains in equity.
