LTCG Tax Harvesting: How to Use the ₹1.25 Lakh Exemption Every Year

Every financial year, the first ₹1.25 lakh of long-term gains on listed shares and equity mutual funds is tax-free. If you don't sell anything, that allowance is simply lost. Tax harvesting uses it: you book gains up to the limit each year and buy back straight away, so you stay invested while the taxable part of your future gain shrinks. Figures below are for FY 2026-27 and come from our capital gains calculator.

Short answer

LTCG tax harvesting means selling equity shares or equity fund units held for more than 12 months to book up to ₹1.25 lakh of long-term gains in a year, which is tax-free, then buying them back at today's price. Your purchase cost goes up, so less of the gain is taxed when you finally sell. Each year you do it can save up to ₹16,250 of future tax.

How much harvesting saves

Long-term gains on listed equity above ₹1.25 lakh a year are taxed at 12.5% under Section 198 (earlier 112A), plus 4% cess. Take an investor on a ₹20 lakh salary whose portfolio gains ₹1.25 lakh each year for four years:

Without harvesting, only one year's ₹1.25 lakh exemption is used, and 12.5% plus cess applies to the other ₹3.75 lakh. With harvesting, each year's exemption covers that year's gain.

How the bill grows if you let gains pile up and sell in a single year:

Step-by-step: how to harvest

1. Find lots held for more than 12 months. Your broker's holdings or capital gains statement shows the buy date of each lot.
2. Work out how much gain you can book. Add up long-term gains you've already booked this year; the room left is ₹1.25 lakh minus that.
3. Sell just enough units to book gains up to that room, before 31 March.
4. Buy back the same shares or fund units. The new cost is today's price.
5. Keep the contract notes and check the gain in your broker's tax P&L and your AIS before you file.

First in, first out

For shares in a demat account, the oldest units are treated as sold first. If you bought the same share several times, the units you sell may not be the ones you expect. Check which lots the broker matches before selling.

Shares bought before 1 February 2018

For older shares, the cost can be taken as the market price on 31 January 2018 if that is higher, which already shields the gains made before that date. Harvesting still helps with gains made after it.

Mistakes that cancel the benefit

• Selling lots held 12 months or less. Those gains are short term and taxed at 20%, with no exemption.
• Forgetting the new holding period. The bought-back units start a fresh 12-month clock. Sell them within a year and the gain is short term.
• Ignoring costs. Brokerage, securities transaction tax and other charges apply on both the sale and the buy-back, and some mutual funds charge an exit load. On a small gain the costs can exceed the tax saved.
• Units you can't sell. ELSS units are locked in for three years from each purchase.
• Income near ₹12 lakh. Harvested gains are tax-free at 12.5% but still count towards the rebate limit, as explained in does the ₹12 lakh rebate cover capital gains?

Harvesting losses too

The same idea works with losses. Selling holdings that are below cost books a capital loss you can set against gains. A short-term loss can be set off against both short-term and long-term gains; a long-term loss only against long-term gains. See capital gains tax on shares and F&O for the rules on setting off and carrying forward losses.

Sources

• Income Tax Department: Section 198 (long-term gains on listed equity)
• Income Tax Department: Section 196 (short-term gains on listed equity)