Long-term capital gains on listed equity shares or equity MF units (with STT) are taxed at 12.5%. The first ₹1,25,000 of such gains per year is exempt. Must be held for more than 12 months.
Long-term investors in listed equity shares and equity-oriented mutual funds.
Scenario
Priya bought ₹1,00,000 of an equity mutual fund in 2023. She redeems it in 2026 for ₹3,00,000 after holding for 36 months.
Calculation
Purchase price: ₹1,00,000 Redemption: ₹3,00,000 LTCG: ₹2,00,000 Exempt LTCG: ₹1,25,000 (threshold per year) Taxable LTCG: ₹2,00,000 – ₹1,25,000 = ₹75,000 Tax: ₹75,000 × 12.5% = ₹9,375 Add 4% cess: ₹9,750
Result
Priya pays only ₹9,750 tax on a ₹2L profit. If she had redeemed just enough (₹2.25L) to limit LTCG to ₹1.25L, she would pay zero tax. She can 'harvest' the ₹1.25L each year by redeeming and reinvesting.
Scenario
Arun has an equity portfolio worth ₹30L with accumulated gains of ₹12L. He wants to reduce future LTCG liability systematically.
Calculation
Strategy: Each year, sell equity to realise exactly ₹1,25,000 LTCG → zero tax Reinvest immediately at the new (higher) market price This resets the cost base for that portion Year 1: Realise ₹1.25L LTCG → ₹0 tax, new cost base established at current price Year 2: Same → ₹0 tax ... Over 9+ years, can cycle through ₹12L+ of embedded gains at zero tax
Result
Tax harvesting is perfectly legal and widely used. By selling and re-buying systematically, Arun shifts his tax liability forward and eventually to zero (if done consistently) without changing his investment exposure.
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Section references are based on the Income Tax Act 2025 (Tax Year 2026-27). Examples are illustrative — verify with a Chartered Accountant before filing.