Introduction

If you hold stocks or mutual funds in your portfolio that have unrealized losses, you can set off these losses against realized profits, on which you have to pay taxes. This act of booking unrealized losses is called Tax-loss Harvesting. 

While there is no explicit regulation in India that disallows tax loss harvesting, it is advisable for clients trading and investing in India to consult a Chartered Accountant (CA) while filing income tax returns, as they could potentially be questioned by the income tax authorities during tax scrutiny if the same stock is sold and bought back to save on the taxes. 

In the US, if stocks are sold and bought back within 30 days just to reduce taxes on realized gains, they are called wash sales, and taxes are disallowed to be offset

Understanding Taxes
When you invest in the markets, you potentially have two types of taxes —

  1. STCG (Short term capital gains tax) or tax on gains made by selling stocks or equity mutual funds held for less than 1 year which are taxed at 15% of the gains.
  2. LTCG (Long-term capital gains tax) or tax on gains made by selling stocks or equity mutual funds held for more than 1 year. First Rs 1 lakh of LTCG is tax-free, and gains above Rs 1 lakh are taxed at 10% LTCG per year.

Please check the below mentioned matrix for understanding the set off rule:

Loss/Gain Type
Set Off against 
Long Term Capital GainShort Term Capital Gain
Long Term Capital LossYesNo
Short term Capital LossYesYes


Abbreviations:

STCG : Short-Term Capital Gain

STCL : Short-Term Capital Loss

LTCG : Long-Term Capital Gain

LTCL : Long-Term Capital Loss

Understanding the Calculations:

Short term opportunity = Equity unrealized STCL +  MF unrealized STCL (Absolute value of sum to be less than the sum of total STCG and total LTCG).

Long term opportunity = Equity unrealized LTCL + MF unrealized LTCL (Absolute value of sum to be less than the remaining total LTCG (refer point vi in the example 1).

Example 1

  • Equity realized STCG = 50k

  • Equity unrealized STCL = 20k

  • MF equity unrealized STCL = 10k

  • MF debt unrealized STCL = 30k

  • Short term opportunity = 20k (Equity unrealised STCL) + 10k (Equity MF unrealised STCL) + 15k (Debt MF unrealised STCL)

  • Remaining 10k STCL can be set off against the equivalent LTCG

Example 2

  • Total STCL = 30K
  • Total STCG = 20K
  • Total LTCL = 40K
  • Total LTCG = 40K
  • Total short term opportunity = 30K (breakdown: 20K from STCG + 10K from LTCG)
    Total long term opportunity = 30K (breakdown: 30K from remaining LTCG)

Example 3

  • In FY 2012, a user bought 10 stocks and they are profitable today with a profit amount of ₹30,000.
  • In FY 2023, the same user bought 8 more stocks and these stocks are currently at a loss with a loss amount of ₹10,000.
  • The user has a short-term capital gain of ₹5,000.

  • Therefore, the user still has a short-term tax loss harvesting opportunity of ₹5,000. However, by FIFO (First-In, First-Out) logic, if the user sells, we, as a broker, will only sell the profit-making stocks first

Important Note:

Users can present the aforementioned transaction as a loss to the Income Tax Department, even though it appears as a profit in the Profit & Loss and tax report of Upstox. With the assistance of their Chartered Accountant, they can offset the capital gains using the trade report transactions for FY 2023.