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Tax Loss Harvesting: Your stock market losses can be used to save income tax this financial year FY25 which is ending on March 31. Check details:
Tax loss harvesting is a strategy used by taxpayers to reduce income tax by setting off portfolio losses against the gains released in other stocks, thus lowering overall capital gains tax liability.
Even as the equity market has declined sharply this year, investors across segments are facing losses. Stocks like IndusInd Bank, Hero MotoCorp, Bajaj Auto, Asian Paints, and Tata Motors are some of the stocks that faced the biggest losses in the past six months of the ongoing market correction. In view of this, there is a silver lining for investors — the losses can be used to save taxes this financial year FY25 which is ending on March 31 through tax loss harvesting.
What Is Tax Loss Harvesting?
Tax loss harvesting is a strategy used by taxpayers to reduce income tax by setting off portfolio losses against the gains released in other stocks, thus lowering overall capital gains tax liability. Excess losses can be carried forward for up to eight years to bring down capital gains in future years.
It is important to know that the long-term capital losses can be set off against long-term capital gains (LTCG) only. However, short-term capital losses can be set off against both short-term capital losses and LTCG.
How Does It Work? An Illustration
In the past six months, though most stocks have fallen, some stocks have posted decent gains also. For instance, Bajaj Finance, Kotak Mahindra Bank, JSW Steel, Eicher Motors and HDFC Bank rising up to 17 per cent.
However, IndusInd Bank, Hero MotoCorp, Bajaj Auto, Asian Paints, and Tata Motors have faced the biggest losses in the past six months.
However, the overall market was upbeat between June 2024 and September 2025, with the Sensex crosses the 85,000 mark.
Now, suppose, an investor earned a short-term gain of Rs 80,000 this year by selling top-performing shares. And now, after over six months of market correction, the investor have unrealised losses of Rs 60,000.
In this case, the investor sell the loss-making stocks. It can reduce the overall short-term capital gains for this year to Rs 20,000 (Rs 80,000 gains minus Rs 60,000 losses).
On a STCG of Rs 80,000, the investor would have paid Rs 16,000 tax as short-term capital gains tax at the rate of 20 per cent. However, after setting off the losses, the capital gains will now have to be paid on Rs 20,000 i.e. Rs 4,000.
This can save Rs 12,000 in capital gains taxes for investors.
However, in case where the losses are higher than the gains, the excessive losses can be carried forward for up to eight years to set off gains in the subsequent years.
Futures & options (both delivery and intra-day) and stocks delivery are considered ‘business income’. However, stocks intra-day trading is considered ‘speculative income’. Speculative losses cannot be set off against business income gains.
Carry Forward of Capital Losses
If the losses are not fully set off in the same financial year due to insufficient gains, they can be carried forward for future adjustment. For example, you have suffered a short-term capital loss of Rs 50,000 on a company’s equity shares in a financial year and gained a short-term capital gain of Rs 30,000 on another company’s shares. In this case, the balance Rs 20,000, which could not be set off this year, can be carried forward in the subsequent eight years. So, this loss can be used to save taxes on the similarly gains in the future eight years.
The rules for carrying forward losses are:
– Capital losses can be carried forward for eight assessment years.
– Losses can be set off only against the same category of income in the subsequent years, i.e., LTCL against LTCG and STCL against STCG/LTCG.
– The taxpayer must file their income tax return (ITR) on or before the due date under Section 139(1) to claim carry-forward benefits. Late filing leads to the forfeiture of this benefit.
– Loss from House property can be set off against income under any head up to a limit of Rs 2 lakhs.
Understanding Carry Forward Of Losses Through An Example
Suppose an investor incurs a short-term capital loss of Rs 1,00,000 in the financial year 2023-24 but has short-term capital gains of only Rs 40,000. The remaining Rs 60,000 can be carried forward to the next financial year and adjusted against future gains for up to eight years.
It is important to note that the ITR must be filed within the original deadline in order to carry forward losses.
