Walk me through LTCG harvesting

LTCG Harvesting — The Mechanics

What it is

Every financial year, ₹1.25 lakh of LTCG — Long-Term Capital Gains — definition">Long-Term Capital Gains (LTCG) on equity is completely tax-free. This exemption resets on April 1 each year — use it or lose it. ^[3]

Harvesting means deliberately realising gains up to that limit annually, then reinvesting immediately — so you reset your cost basis upward without paying tax.

Why it matters — a concrete illustration

Suppose you bought an equity fund at ₹10 lakh, and it is now worth ₹13 lakh after 18+ months. You have ₹3 lakh in unrealised LTCG.

Without harvesting:
When you eventually sell, the entire ₹3 lakh is taxable above the ₹1.25 lakh exemption.
Tax = 12.5% × (₹3,00,000 − ₹1,25,000) = ₹21,875 ^[7]

With annual harvesting (spread over 2–3 years):
Each year you redeem enough units to book ≤ ₹1.25 lakh of LTCG and reinvest immediately.
Tax in each of those years = ₹0.
Your new cost basis is higher, so future taxable gains are smaller.

The four-step process

1. Check your unrealised LTCG — total equity fund + direct equity LTCG across all folios (PMS gains must also be aggregated) ^[10]
2. Calculate headroom — how much of the ₹1.25 lakh exemption is already used by other equity sales that year
3. Redeem the right amount — sell enough units to land just under ₹1.25 lakh net LTCG
4. Reinvest immediately — buy back the same fund (no STT issue; no wash-sale rule in India). Your cost basis resets.

Key conditions and guardrails

When it's most valuable

• 30% bracket investors — the avoided future tax is worth the most to you
• Long horizons — the compounding benefit of a higher cost basis grows over time
• Large unrealised gains — if your equity portfolio has grown significantly, systematic annual harvesting prevents a large tax bill from accumulating

What it does NOT do

• It does not eliminate tax — it defers and reduces it by using the annual exemption efficiently
• It does not change your market exposure (you reinvest immediately)
• It requires tracking across all equity holdings — Mutual Fund — definition">mutual funds, PMS, direct stocks — to avoid accidentally exceeding the ₹1.25 lakh threshold ^[10]

Apply this → Before March 31, check your unrealised LTCG across all equity folios. Use Explore Funds — LTCG Harvesting Tool to identify which holdings have crossed 12 months and are candidates for redemption.