Tax planning guides Tax harvesting
Tax Harvesting: Use Your ₹1.25 Lakh Tax-Free Limit Every Year
Long-term gains on equity funds are tax-free up to ₹1.25 lakh in every financial year. The allowance does not carry forward, so a simple yearly habit of booking gains and reinvesting can legally keep your long-term equity tax close to zero.
How it works
- Sell some units held for more than 12 months, so the long-term gain booked stays within ₹1.25 lakh.
- Reinvest right away into the same or a similar fund, so you stay invested.
- Your purchase cost goes up, so the taxable gain when you finally redeem is smaller.
Worked example: ₹5 lakh lump sum
Assumed growth of 12% a year for five years (illustration only).
| Year | Gain booked that year | Tax |
|---|---|---|
| Year 1 | ₹0.60 lakh | ₹0 |
| Year 2 | ₹0.67 lakh | ₹0 |
| Year 3 | ₹0.75 lakh | ₹0 |
| Year 4 | ₹0.84 lakh | ₹0 |
| Year 5 | ₹0.94 lakh | ₹0 |
Without harvesting, the full gain of about ₹3.81 lakh is booked in year 5. Tax at 12.5% plus cess on the ₹2.56 lakh above the limit is about ₹33,300. With yearly harvesting, every year stays within the limit and the tax is ₹0, with the same funds and the same final value.
Your March checklist
- Download the capital-gains statement for all funds and shares in your name.
- Identify units held for more than 12 months.
- Book long-term gains of up to ₹1.25 lakh across all holdings.
- Reinvest the money the same week.
- Report the gains in your tax return, even when no tax is due.
Watch-outs
- The ₹1.25 lakh limit is per person and covers listed shares and equity funds together.
- Reinvested units start a new 12-month holding period.
- Check exit loads before redeeming; ELSS units remain locked for 3 years.
Common questions
Is tax harvesting legal?
Yes. You are using the yearly exemption the law provides. Keep records and report the gains in your return.
Can each family member harvest separately?
Yes. Every adult has their own ₹1.25 lakh limit on investments made from their own income. See our family tax planning guide.
Please note: This guide is investor education, not tax or investment advice. Figures are illustrations using assumed returns and are not guaranteed. Tax rules shown apply for FY 2026-27 (tax rules as of September 2026) and can change; please confirm your own situation with a chartered accountant. Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.
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