"Book ₹1.25 lakh of gains every year and pay zero tax": What ITA 2025 actually says

Every February, the same message circulates: "Sell shares worth ₹1.25 lakh of profit before 31 March, buy them back the next morning, and you've legally erased that tax forever." The claim is usually followed by a warning that "India has a wash-sale rule now, so be careful" — or by the opposite assurance that you can do it in every demat account you own and multiply the benefit.

Both the enthusiasm and the warning are wrong in specific ways. The strategy is real and it is legal. The exemption is not per account. And India still has no general wash-sale rule for harvesting gains. Here is what the law actually provides, and where the people repeating this advice lose money by getting the mechanics wrong.

What the law actually says

The exemption. Long-term capital gains on listed equity shares and equity-oriented mutual funds are exempt up to ₹1,25,000 per person per tax year. Gains above that threshold are taxed at 12.5% without indexation. This sits in Section 112A of the Income-tax Act 1961, carried forward substantively unchanged into the Income-tax Act 2025, which took effect from 1 April 2026.

Two terminology changes matter when you read any official document now. ITA 2025 uses "Tax Year" — there is no longer a separate "Previous Year" and "Assessment Year". And the annual tax credit statement you will reconcile against is Form 26AS, now Form 168 under ITA 2025.

The rates. For listed equity and equity-oriented funds held more than 12 months, the gain is long-term and taxed at 12.5% above the ₹1.25 lakh shield. Held 12 months or less, it is short-term and taxed at 20% under Section 111A (ITA 1961). Note what this means for harvesting: short-term gains get no exemption at all. Harvesting only works on the long-term side.

Grandfathering still applies. For shares and units acquired on or before 31 January 2018, your cost of acquisition is the higher of actual cost or the fair market value on 31 January 2018 — capped so the substituted cost cannot exceed your sale price. This provision survived into ITA 2025. Holders of long-dated positions frequently forget it and over-report gains.

What the exemption does NOT cover. The ₹1.25 lakh shield applies only to Section 112A assets — listed equity shares on which STT was paid, and equity-oriented mutual funds. It does not apply to:

• Debt mutual funds purchased on or after 1 April 2023 (Section 50AA deems these short-term regardless of holding period; taxed at slab rates)
• Unlisted shares
• Immovable property
• Gold, bonds, and physical assets
• Foreign listed securities

A US-listed stock held through an Indian broker's international arm does not get this exemption. Neither does an unlisted startup ESOP position.

The wash-sale gap. This is where the WhatsApp advice is closest to correct and the caution is wrong. India has no general wash-sale rule — nothing resembling the US 30-day rule that disallows a repurchase. What India has instead are two narrow anti-avoidance provisions:

• Section 94(7) — dividend stripping. If you buy a security within 3 months before a record date and sell it within 3 months after (9 months for mutual fund units), the loss is disallowed to the extent of the exempt dividend or income received.
• Section 94(8) — bonus stripping. Similar logic applied to bonus issues and bonus units.

Neither provision touches a straightforward sell-and-repurchase based on price alone, with no record date involved. Both were carried into ITA 2025. Above them sits GAAR (Sections 95–102), but GAAR is invoked only where the tax benefit in the arrangement exceeds ₹3 crore and the arrangement lacks commercial substance. Harvesting ₹1.25 lakh of gain does not come within a hundred miles of that threshold.

The exemption is per person, not per account. This is the single most expensive misunderstanding. The ₹1,25,000 is aggregated across every demat account, every broker, every folio, and every AMC you hold, for one PAN, in one tax year. Three brokers does not mean ₹3.75 lakh. Your spouse has a separate ₹1.25 lakh only if the capital is genuinely hers — otherwise Section 64 clubbing applies and the gain comes back to you.

Practical implications for NRIs

If you are an NRI, the arithmetic changes in one important way, and it is a cash-flow problem rather than a tax problem.

TDS is deducted at source and ignores your exemption. When an NRI redeems equity-oriented mutual fund units, the AMC deducts TDS under Section 195 on the gain — at 12.5% for long-term gains on equity funds, 20% for short-term. The AMC does not apply your ₹1.25 lakh exemption. It has no way to know what you have already realised elsewhere. For listed shares sold on an exchange through a PIS account, the designated bank computes and deducts similarly.

So the NRI harvesting ₹1,25,000 of long-term gain sees roughly ₹15,625 deducted at redemption, even though the final liability is zero. That money is recovered only by filing an ITR and claiming the refund. Budget for a 9–15 month gap between deduction and refund.

Worked example. You hold an equity-oriented fund: ₹10,00,000 invested, now worth ₹13,00,000. Unrealised long-term gain is ₹3,00,000, meaning 23.08% of any redemption value is gain.

To realise exactly ₹1,25,000 of gain, you redeem ₹5,41,667 worth of units (₹1,25,000 ÷ 0.2308). Of that, ₹4,16,667 is return of cost. You immediately reinvest the full ₹5,41,667.

Your unit count is roughly the same. Your cost basis has risen by ₹1,25,000. Tax paid: zero, permanently. Repeat annually and, at a 12.5% rate, you shelter ₹15,625 per year — about ₹1.56 lakh of tax over a decade, before accounting for the compounding effect of the higher basis.

Where NRIs lose money doing this. Three costs are real and often overlooked: the TDS float described above; exit load if the fund charges one on units held under 12 months (harvest only the tranches past the load period); and one day of market exposure if you sell and buy on different days. On a ₹5.4 lakh position, a 2% overnight move costs ₹10,800 — two-thirds of the entire annual tax saving. Execute same-day where the instrument allows it.

Loss harvesting is a separate and larger opportunity. Under Section 74 (ITA 1961, retained in ITA 2025), long-term capital losses set off only against long-term capital gains. Short-term capital losses set off against both short-term and long-term gains — which makes short-term losses the more valuable asset. Unabsorbed losses carry forward eight tax years, but only if you file your return by the Section 139(1) due date. Miss the deadline and the carry-forward is lost outright. For NRIs on the 31 July deadline in non-audit cases, this is the most common self-inflicted loss I see.

Step-by-step: what to do

• Pull a consolidated capital gains statement from CAMS and KFintech (covering all mutual fund folios across AMCs) and a P&L statement from each broker. Do this in January, not March.
• Segregate long-term from short-term. Only positions held more than 12 months qualify. Tag the exact acquisition date of each tranche — SIP investments create dozens of tranches with different clocks.
• Add up long-term gains already realised in the current tax year from any source. The ₹1,25,000 is what remains after those.
• Compute the redemption value needed. Gain ÷ (unrealised gain ÷ current value). Redeem slightly under, not over — a miscalculation that pushes you to ₹1.30 lakh costs 12.5% on the excess plus applicable surcharge and cess.
• Check exit load and lock-in. ELSS units under their 3-year lock-in cannot be redeemed at all. Skip any tranche still inside an exit-load window.
• Execute before the deadline, with settlement in mind. For mutual funds, the applicable NAV is the day the AMC receives the request before cut-off (3:00 PM for equity schemes). For listed shares, the transaction date governs. If 31 March falls on a weekend or exchange holiday, your effective deadline is the last trading day before it — confirm the NSE/BSE calendar rather than assuming.
• Reinvest the same day where possible. Same-day sell-and-buy in listed equity eliminates overnight gap risk. In mutual funds, a same-day redemption and fresh purchase is the closest equivalent.
• Reconcile against Form 26AS (now Form 168 under ITA 2025) before filing. Every TDS deduction by an AMC or PIS bank must appear there. If it does not, chase the deductor — you cannot claim credit for a deduction that was never reported.
• File your ITR by the due date even if your computed liability is nil. Refund of TDS and carry-forward of losses both depend on it.

FAQ

Q: If I sell on 31 March and buy back on 1 April, is the gain disallowed?

No. There is no provision in ITA 2025 disallowing a repurchase after a gain sale. Sections 94(7) and 94(8) address dividend stripping and bonus stripping respectively, both of which require a record date in the transaction chain. A price-based sell-and-repurchase is not covered. Same-day repurchase is equally permissible — and better, because it eliminates overnight price risk.

Q: I have three demat accounts. Can I claim ₹1.25 lakh in each?

No. The exemption is per PAN per tax year, aggregated across all accounts, brokers, folios, and AMCs. Three accounts give you ₹1,25,000 total. Your spouse or adult child has a separate ₹1,25,000 only where the invested capital is genuinely theirs; if you funded it, Section 64 clubbing brings the income back to you.

Q: As an NRI, will the AMC apply my ₹1.25 lakh exemption before deducting TDS?

No. The AMC deducts under Section 195 on the full gain — 12.5% for long-term on equity funds, 20% for short-term — without applying the exemption, because it cannot see your other realisations. You recover the excess by filing an ITR and claiming a refund. Plan for the cash to be locked up for roughly 9 to 15 months.

Q: Can I harvest gains in a debt fund the same way?

No. Debt mutual funds purchased on or after 1 April 2023 are deemed short-term under Section 50AA regardless of holding period and taxed at your slab rate, with no ₹1.25 lakh exemption available. Units purchased before that date retain their earlier treatment. Check your purchase dates before assuming — investors who switched schemes in 2023 often hold both categories in the same folio.

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The strategy works. What kills the benefit is the execution: harvesting past the threshold, forgetting units already realised earlier in the year, ignoring exit load, or taking overnight risk that exceeds the tax saved. The arithmetic is small enough that a single sloppy step erases a full year of benefit.

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

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See Also

• "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
• "Perks aren't really taxed": what Section 17(2) and the Income-tax Rules 2026 actually say

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