"Just sell and rebuy on March 31 to reset your gains": What ITA 2025 actually says about capital gains harvesting

Every February, a version of the same message circulates in NRI investor groups: "Sell your equity mutual funds on March 30, book ₹1.25 lakh of long-term gains tax-free, buy them back on March 31, and you've permanently reset your cost base for free." The claim is repeated confidently enough that people act on it without checking a single provision. The strategy is real. The way most people describe it is wrong on three separate counts — the exemption is not per-transaction, the rebuy does not always restore what they think it restores, and for NRIs specifically, a layer of TDS sits between the sale proceeds and the bank account that resident investors never encounter.

Here is what the law actually says, and what an NRI should do about it before Tax Year 2026-27 closes.

What the law actually says

The exemption itself. Long-term capital gains on listed equity shares and equity-oriented mutual funds — gains covered by what was Section 112A of the Income-tax Act, 1961, and is carried forward in substance under the Income Tax Act, 2025 — are exempt up to ₹1,25,000 in aggregate for the tax year. Gains above that threshold are taxed at 12.5% without indexation. The critical word is aggregate. The exemption attaches to the taxpayer for the tax year, not to each sale, each folio, each demat account, or each scrip. Selling across five folios on five different days does not produce five exemptions. It produces one, applied to the total.

"Tax Year", not "Previous Year". ITA 2025 replaced the old twin concepts of Previous Year and Assessment Year with a single "Tax Year". This matters practically, because the harvesting window is defined by the tax year boundary: 1 April to 31 March. For gains to fall inside Tax Year 2026-27, the transfer must be complete on or before 31 March 2027.

There is no wash-sale rule for this. India has no statutory provision that disallows a loss or reverses an exemption because you repurchased the same security shortly after selling it. This is the genuine gap that makes harvesting work, and it is worth stating plainly: unlike several other jurisdictions, Indian law does not impose a 30-day cooling-off period for repurchasing a security you have just sold. The General Anti-Avoidance Rules exist and can be invoked against arrangements whose main purpose is obtaining a tax benefit, but a straightforward market sale and market repurchase of a liquid listed security at market prices, with real consideration moving and real market risk borne, is an ordinary commercial transaction. What is not protected is a circular, off-market, pre-arranged round trip designed purely to manufacture a paper loss.

Residency determines the mechanics, not the rate. Section 6 of ITA 2025 governs residential status, and the day-count tests are the same tests carried forward from ITA 1961. Your residential status does not change the 12.5% rate or the ₹1.25 lakh exemption — an NRI and a resident are taxed identically on listed equity LTCG. What residency changes is collection: for an NRI, tax is deducted at source at the time of redemption, before the money reaches you.

Holding period. For listed equity shares and equity-oriented mutual funds, more than 12 months of holding makes the gain long-term. For most other capital assets, including debt-oriented funds, unlisted shares and immovable property, the threshold is 24 months, and the ₹1.25 lakh exemption does not apply to them at all.

Practical implications for NRIs

The TDS layer changes the arithmetic completely. When a resident redeems equity mutual fund units, nothing is deducted; the tax is settled through advance tax and the annual return. When an NRI redeems the same units from the same scheme on the same day, the AMC deducts TDS on the gain — long-term equity gains at 12.5% plus applicable surcharge and cess, and short-term equity gains at 20% plus surcharge and cess.

The important detail: the deduction is generally applied to the gain computed by the AMC or registrar, without giving you credit for the ₹1.25 lakh exemption and without knowing about losses sitting in your other folios. The exemption is a return-level relief, not a deduction-level one.

Consider an NRI in Dubai who redeems equity fund units in January 2027 with a long-term gain of exactly ₹1,20,000. That gain is entirely within the exemption. The final tax liability is nil. But TDS of roughly ₹15,000 plus cess will still be deducted at redemption. That money is not lost — it becomes a credit visible in Form 26AS (now Form 168 under ITA 2025) and is refunded when the return is filed. It is, however, cash locked up for a year or more. An NRI who harvests ₹1.25 lakh of gains across four separate funds in the same tax year will have roughly ₹60,000 sitting with the department awaiting refund, in exchange for a tax saving that was already nil.

This is the single most common failure in NRI harvesting: treating a resident-investor strategy as transferable without pricing in the working-capital cost of a refund cycle.

The repurchase does not reset the clock in your favour. Sell and rebuy and the new units carry a fresh acquisition date. Their holding period restarts at zero. If you need to exit within the following twelve months, you will have converted a would-be long-term gain at 12.5% into a short-term gain at 20%. Harvesting is only sensible where you intend to hold the replacement position for more than another twelve months.

The rebuy price is not guaranteed. Mutual fund redemption and fresh purchase settle at different NAVs on different days. Between the two, the market moves. The gap is usually small; occasionally it is not. You are taking real market risk to capture a maximum saving of ₹15,625 — that is 12.5% of ₹1,25,000. Understanding the ceiling on the benefit keeps the strategy in proportion.

Loss harvesting is often the more valuable half. Short-term capital losses can be set off against both short-term and long-term gains. Long-term capital losses can be set off only against long-term gains. Unabsorbed losses carry forward for eight tax years — but only if the return is filed by the due date. An NRI who files late loses the carry-forward entirely. For a portfolio carrying an underwater position, booking that loss before 31 March and shielding gains elsewhere is frequently worth more than the ₹1.25 lakh exemption.

Exit load and stamp duty. Equity funds commonly carry a 1% exit load on redemption within twelve months, and fresh purchases attract stamp duty of 0.005%. On a ₹10 lakh redemption, a 1% exit load is ₹10,000 — which exceeds the entire ₹15,625 ceiling on the tax benefit. Check the exit load before you do anything else.

Step-by-step: what to do

• Pull your realised position for the tax year first. Log in to the income tax portal and open the Annual Information Statement, and separately download capital gains statements from CAMS and KFintech. You cannot size a harvest without knowing what gains you have already booked between 1 April 2026 and today.
• Compute headroom. Headroom = ₹1,25,000 minus long-term equity gains already realised in Tax Year 2026-27. If you have already booked ₹90,000, your remaining headroom is ₹35,000. If you have already crossed ₹1.25 lakh, there is no exemption left to harvest and the exercise stops here.
• Identify units held more than 12 months. Only these qualify. Sort holdings by acquisition date and exclude anything purchased after March 2026. SIP instalments are separate acquisitions — a SIP running since 2023 has a mix of qualifying and non-qualifying units, redeemed on a first-in-first-out basis.
• Check exit load and lock-in. Exclude ELSS units still inside the three-year lock-in and any position where the exit load exceeds the tax saving.
• Size the redemption to the gain, not the value. If a fund has appreciated 40% and you need to realise ₹35,000 of gain, you are redeeming roughly ₹1,22,500 of value, not ₹35,000. Work backwards from the gain.
• Execute by mid-March, not 31 March. Mutual fund redemptions settle T+2 and equity trades T+1. A 31 March instruction may not constitute a completed transfer within the tax year. Target the second week of March.
• Repurchase after settlement. Wait for redemption proceeds to credit, then place the fresh purchase. Do not attempt an off-market or pre-arranged swap.
• Reconcile the TDS. After the quarter closes, check Form 26AS (now Form 168 under ITA 2025) and confirm the deducted amount appears against your PAN. If the AMC has deducted against a stale residential status or the wrong PAN, get it corrected at source — a TDS credit that is not reflected in Form 168 cannot be claimed in the return.
• File on time. Claim the refund of excess TDS and, if you booked losses, carry them forward. Filing by the due date is the condition for carry-forward.

FAQ

Does the ₹1.25 lakh exemption apply separately to each mutual fund folio?
No. It is a single aggregate threshold per taxpayer per tax year, applied to total long-term gains on listed equity and equity-oriented funds across every folio, demat account and broker. Multiple accounts do not multiply the exemption.

Can I sell on Monday and buy back the same fund on Wednesday?
Yes. Indian law contains no wash-sale provision for listed securities, so a genuine market sale followed by a genuine market repurchase is permissible. Keep both legs on-market, at market prices, with actual settlement. The gap you should worry about is price movement between the two legs, not legality.

As an NRI, can I avoid TDS on a redemption that falls entirely within the exemption?
Not at the redemption stage under normal circumstances. The AMC deducts on the computed gain regardless of your exemption headroom. The remedy is either a lower or nil deduction certificate under the relevant provision, applied for in advance, or claiming the refund when you file. For most retail-sized harvests the certificate route costs more in effort than the interest value of the blocked refund.

If I harvest a loss in December 2026, how long can I carry it forward?
Eight tax years from the tax year in which the loss arose, so through Tax Year 2034-35 — provided the return for Tax Year 2026-27 is filed by the due date. Long-term losses set off only against long-term gains; short-term losses set off against either. A late return forfeits the carry-forward permanently.

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Harvesting is a genuine, legal strategy with a hard ceiling of ₹15,625 in annual benefit, and for NRIs it carries a refund-cycle cost that residents never see. Whether it is worth doing depends entirely on your existing realised gains, your exit loads, and your holding horizon — numbers that are specific to your portfolio.

For your specific situation, book a consultation at harunraaj.com.

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See Also

• "Book ₹1.25 lakh of gains every year and pay zero tax": What ITA 2025 actually says
• "I'll just park it in NHAI bonds": What Section 54EC actually says in 2026
• "Internal audit is just a smaller statutory audit": what Section 138 actually requires

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