LTCG harvesting is a tax-efficient rebalancing technique. Here's the mechanics:
In India, equity funds held > 12 months enjoy LTCG tax treatment: 12.5% flat on gains above ₹1.25 lakh per financial year [3]. The ₹1.25 lakh exemption resets every April 1.
So if you have accumulated gains in equity funds, you can:
1. Redeem up to ₹1.25 lakh of gains each year (not corpus) — tax-free
2. Reinvest immediately — your allocation stays intact
3. Repeat next April
Assume you hold an equity fund with:
- Cost: ₹10 lakh
- Current value: ₹15 lakh
- Unrealised gain: ₹5 lakh
April Year 1: Redeem ₹1.25 lakh of gains tax-free. You extract cash, your holding drops to ₹13.75 lakh (still ₹10 lakh cost base + ₹3.75 lakh remaining gain).
Reinvest immediately in the same fund or a different equity fund. Your total risky allocation is unchanged; you just reset the cost base on part of your holding.
April Year 2: Repeat. Another ₹1.25 lakh of gains, tax-free.
Over 4 years, you harvest ₹5 lakh in gains without paying tax — as long as you stay within the annual exemption.
The alternative: If you did nothing and exited entirely after 4 years, you'd owe 12.5% on the full ₹5 lakh = ₹62,500 in tax. By harvesting, you pay ₹0.
Reinvestment discipline: The harvesting forces you to rebalance and lock in gains systematically — useful behavioural discipline if you tend to hold winners