New Delhi, March 19 Heightened market volatility and a late-March push to optimise tax outgo are prompting a growing number of equity investors to adopt tax-loss harvesting, a strategy that involves realising losses to offset gains and reduce tax liability, according to tax practitioners and wealth advisers.
A Delhi-based entrepreneur, who asked not to be identified, said he rebalanced his portfolio after several holdings breached key price levels. He booked losses of about ₹1.2 lakh against short-term capital gains of Rs 2 lakh in the current financial year, reducing his taxable gains to roughly ₹80,000. At prevailing short-term capital gains rates, that translated into a significantly lower tax outgo.
“As prices of some of my stocks broke two support level, so I sold them with a loss of around ₹1.20 lakh. My short term gain is effectively now ₹80,000. If I had to pay STCG tax on ₹2 lakh, my liability would have been ₹40,000, but I have paid only ₹16,000 (surcharge and cess not included). The adjustment is within the law,” he said.
Growing trend among investors ahead of financial year-end
Advisers say such transactions are becoming more common as markets correct and investors reassess portfolios before the financial year closes.
“Tax-loss harvesting involves selling investments that are in a loss to reduce tax liability. This can be a useful planning strategy, particularly in the current market environment and at year-end,” said Hardik Mehta, Lead-Tax at Ionic Wealth. He added that the benefit is contingent on filing income-tax returns within the prescribed deadlines.
Tax rules and carrying forward losses
Under Indian tax rules, short-term capital losses can be set off against both short- and long-term gains, while long-term losses can be adjusted only against long-term gains. Unabsorbed losses may be carried forward for up to eight assessment years, subject to timely filing.
Some advisers view the current correction as creating a window to convert unrealised losses into tax assets.
“The market environment presents an opportunity for investors to review portfolios and crystallise losses for tax efficiency,” said Rahul Jain, Partner at Khaitan & Co. He cautioned that only realised losses, not notional ones, qualify and that transactions entail costs such as brokerage and securities transaction tax.
Practitioners warn against mechanical application of the strategy
Practitioners, however, warn against treating the strategy as mechanical. Portfolio considerations, potential regulatory scrutiny and tax computation rules need to be weighed. “Factors such as overall portfolio strategy, the impact of the FIFO method, and the possibility of scrutiny in cases of immediate repurchase of similar securities should be carefully evaluated,” said Amit Maheshwari, Managing Partner, AKM Global.
Potential unintended consequences and regulatory scrutiny
There can also be unintended tax consequences if transactions alter the holding period of assets. Priyanka Duggal, Partner at Grant Thornton Bharat, noted that selling and re-entering positions could convert what would have been long-term capital gains, taxed at lower rates, into short-term gains taxed at higher rates.
Advisers also flag anti-avoidance provisions. According to Duggal, the General Anti-Avoidance Rules (GAAR) may apply if transactions are deemed to lack commercial substance or are undertaken solely to evade tax.
“Assessees must ensure transactions are backed by genuine commercial intent and not structured to create artificial losses,” said Rajat Mohan, Senior Partner at AMRG & Associates.
He added that near-simultaneous buybacks of identical securities and inadequate documentation could invite scrutiny.
Year-end outlook: compliance-driven tax-loss harvesting
With markets remaining volatile and the financial year-end approaching, advisers expect tax-loss harvesting to remain elevated, within the bounds of compliance and portfolio strategy.