- November 16, 2025
Tax Harvesting Explained: The Simple Strategy To Lower Equity Gain Taxes In 2025
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Indian households, especially GenZ, are investing more in equities and mutual funds. Check how to save capital gain taxes on investments.
With the rising investment in equities and mutual funds, young or new one investors must aware of long-term and short-term taxes on capital gains.
The percentage of Indian households that have been investing in equities and mutual funds has grown steadily in the last few years. The shift of mindset is coming especially among GenZ who choose risky but highly rewarding assets to invest rather than just fixed deposits, which are favourite among millenniums.
With the rising investment in equities and mutual funds, young or new one investors must aware of long-term and short-term taxes on capital gains. For instance, if someone tries to sell shares of an X company after 1 year, then there needs to pay long-term tax on capital gains. Below this threshold, short-term capital gains will be applied.
As more Indians move towards wealth creation through equities, mutual funds, and ETFs, the focus has shifted from just earning returns to preserving those returns by saving tax. One powerful yet underrated strategy that investors can use—especially in 2025—is Tax Harvesting.
If used smartly, tax harvesting can significantly reduce your long-term capital gains (LTCG) tax burden, improve post-tax returns, and keep your portfolio tax-efficient, says CA Ruchika Bhagat, MD, Neeraj Bhagat & Co.
What Is Tax Harvesting?
Tax harvesting is a strategy where investors book profits strategically to take advantage of the ₹1 lakh tax-free limit on long-term capital gains (LTCG) from equity shares and equity mutual funds each financial year.
Under Indian tax laws:
• LTCG on equity above ₹1,00,000 is taxed at 10% (without indexation).
• However, gains up to ₹1,00,000 each year are tax-free.
Here’s a complete guide to help you understand and implement it effectively.
Bhagat says that using equity investments, book profits up to ₹1 lakh, and then immediately reinvest in the same or similar securities. This resets your purchase price, allowing you to save tax in future years when your portfolio grows more.
Some reasons why tax harvesting is crucial this year:
1. Higher Market Valuations
Indian equity indices are witnessing all-time highs. This means many long-term investors are sitting on substantial unrealised gains, making it an ideal time to harvest profits.
2. SIP Investors Have Hidden Gains
Most Indians invest through SIPs in equity mutual funds. Over time, these SIPs accumulate multiple small gains that add up. Tax harvesting helps realise these gains systematically and tax-free.
3. More Investors Falling into Higher Tax Brackets
With rising incomes and stricter compliance, optimising tax outflows has become essential. Tax harvesting is a legal, smart, and clean method to reduce tax liability.
How Tax Harvesting Works (Example for 2025)
Let’s understand the strategy with a simple example.
Suppose you invested ₹5,00,000 in an equity mutual fund in 2021.
By 2025, it has grown to ₹7,50,000.
Your total gain = ₹2,50,000.
If you redeem it now:
• The first ₹1,00,000 gain is tax-free.
• The remaining ₹1,50,000 will attract LTCG tax @10%.
But using tax harvesting, you can avoid this.
Step 1: Sell units to realise ₹1,00,000 profit
You redeem just enough units so that your gain equals the tax-free limit.
Step 2: Immediately repurchase the same units
This resets the purchase price (NAV), meaning future gains are calculated on a higher base.
Step 3: Repeat every financial year
Over time, you save tax on multiple ₹1 lakh chunks of gain each year.
Benefits of Tax Harvesting
1. Reduces Future Tax Liability
By resetting your cost of acquisition every year, you reduce taxable gains in the future.
2. Improves Post-Tax Returns
The more tax you legally avoid, the higher your real returns become.
3. Works Perfectly with SIP Investors
As SIPs accumulate gains at different periods, annual harvesting keeps taxation under control.
4. No Impact on Portfolio Allocation
You sell and repurchase the same investments, so your long-term strategy remains intact.
5. 100% Legal and Compliant
Tax harvesting is a government-approved tax planning method—not tax evasion.
Pair Tax Harvesting With Tax Loss Harvesting
Along with harvesting gains, smart investors also use tax loss harvesting:
If some stocks/mutual funds are in loss, you can sell them to set off gains from profitable holdings.
This reduces your overall capital gains tax liability even further.
Together, both methods help create a tax-efficient and resilient portfolio.
Common Mistakes to Avoid
Waiting till March
- Many investors rush in the last week of the financial year, leading to errors.
- Instead, analyse your portfolio periodically and act before March 31st.
Not Considering Exit Loads
- Some mutual funds charge exit loads for units held for less than a year.
- Check before selling.
Triggering Short-Term Gains Accidentally
Ensure the units you are redeeming have been held for at least 12 months, or they will be taxed as short-term gains @15%.
Ignoring Brokerage and Transaction Costs
Frequent buying and selling may involve minor charges, factor them in.
Who Should Use Tax Harvesting in 2025?
• Equity mutual fund SIP investors
• Long-term equity investors with gains above ₹1 lakh
• HNIs looking to optimise tax outflows
• Young professionals building long-term wealth
• Retirees using SWP from mutual funds
In short, anyone with significant long-term unrealised equity gains can benefit.
Bhagat adds that tax harvesting continues to be one of the most effective and under-utilised tax-saving strategies available to Indian investors in 2025
Varun Yadav is a Sub Editor at News18 Business Digital. He writes articles on markets, personal finance, technology, and more. He completed his post-graduation diploma in English Journalism from the Indian Inst…Read More
Varun Yadav is a Sub Editor at News18 Business Digital. He writes articles on markets, personal finance, technology, and more. He completed his post-graduation diploma in English Journalism from the Indian Inst… Read More
November 16, 2025, 12:41 IST
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