Tax harvesting is the strategy of systematically booking profits up to the annual LTCG tax-free threshold (₹1.25 lakh) and immediately reinvesting — resetting your cost basis to reduce future tax liability.
LTCG on equity funds above ₹1.25 lakh is taxed at 12.5%. But gains up to ₹1.25 lakh per financial year are tax-free. Tax harvesting exploits this by booking ₹1.25 lakh of equity fund gains annually — even with no immediate cash need — and immediately reinvesting the proceeds. This 'resets' your cost basis upward, reducing future taxable gains. Over 10–15 years of disciplined annual tax harvesting, the cumulative tax savings can be significant.
Each year, you're allowed ₹1.25 lakh of equity fund profits tax-free. If you don't use this allowance, it's gone. Tax harvesting is simply 'spending' this allowance strategically every year — sell enough equity fund units to book ₹1.25 lakh gain, then buy back the same fund the next day. Your portfolio looks identical but your tax cost has been permanently reduced on that portion.
Every March, calculate which equity fund holdings have LTCG (held 12+ months).
Identify units where gain (current value − purchase price) = ₹1.25 lakh.
Redeem those units; pay zero tax (below threshold).
Immediately reinvest in the same or similar fund.
Your new cost basis is higher — reducing future taxable gains.
You have 1,000 units of a fund bought at NAV ₹100 (cost: ₹1,00,000). Current NAV: ₹225. LTCG = ₹1,25,000. Sell 1,000 units → receive ₹2,25,000. LTCG = ₹1,25,000 → zero tax. Next day: Buy 1,000 units at ₹225. New cost: ₹2,25,000. If you later sell at NAV ₹400, your gain = ₹1,75,000 instead of ₹3,00,000 — you've pre-paid the first ₹1,25,000 tax-free.