The ₹1.25 lakh LTCG exemption — the most under-used tax tool in India

Every year, Indian equity investors leave thousands of rupees of tax savings on the table. The reason: they don't actively harvest the ₹1.25 lakh LTCG exemption that's available to them every single financial year.

This post explains what tax harvesting is, why it matters, and how to set up a 30-minute March-end workflow that saves you ₹12,500 to ₹40,000 in tax per year.

What the rule says

Under current Indian tax law (post-Jul 2024):

Long-term capital gains (held >12 months) on listed equity/equity MFs are taxed at 12.5%

But there's an annual exemption of ₹1.25 lakhs per individual

The exemption applies per financial year — use it or lose it. There's no rollover.

What "harvesting" means

You sell units that have appreciated and immediately re-buy the same units. The net economic position is identical (you own the same number of units in the same fund), but you've realised the gains up to ₹1.25L, which are now tax-exempt and your cost basis has reset higher.

When you eventually sell for real, you only pay tax on gains above this new (higher) cost basis. You've permanently saved tax on ₹1.25L of gains.

A simple example

Say you bought ₹10L of an equity mutual fund 18 months ago. It's now worth ₹15L (₹5L unrealised gain).

Without harvesting: You hold for another 10 years, eventually sell at ₹40L. LTCG = ₹40L − ₹10L = ₹30L. Tax = 12.5% × (₹30L − ₹1.25L) = ₹3,59,375.

With harvesting (assume you harvest each year): Each year you sell ₹1.25L of gains and re-buy. After 10 years, you've harvested 10 × ₹1.25L = ₹12.5L of gains tax-free, and your cost basis has reset accordingly. The final sale's tax liability drops to roughly 12.5% × (₹17.5L − ₹1.25L) = ₹2,03,125.

Net savings: ₹1,56,250 over 10 years, just from this one fund. For a serious investor with multiple funds, this can scale to ₹5-10L of lifetime tax savings.

How to actually do it

Every March (3rd or 4th week is fine):

Pull your equity mutual fund holdings — direct units only, regular plan units don't behave the same way

For each fund, identify long-term (>12 month) holdings with appreciation

Calculate the redemption amount needed to realise gains close to ₹1.25L total (across all funds)

Execute the redemption through the AMC website or platform

Immediately invest the same redemption proceeds back into the same funds

The crucial bit: you must execute the redemption AND the re-purchase in the same fund family ideally on the same day to minimise market gap risk. Use Direct plans on Coin, Kuvera, or MFCentral.

Common questions

Will the exit load apply?

Most equity MFs have exit load only in the first 1 year. Since you're harvesting long-term holdings, no exit load applies.

Does it work for direct stocks too?

Yes — same principle. Sell and re-buy listed equity. Bear in mind delivery brokerage costs (small with discount brokers, but real).

What if I have a loss to set off?

Even better. Harvest STCG losses first (they offset both STCG and LTCG), then use the ₹1.25L exemption on remaining gains. This requires more careful planning — happy to walk you through it.

Do I need to actually sell, or is there a paper trick?

Yes, you need to actually execute a sale and a purchase. There's no automatic exemption — it has to be a realised gain.

Why doesn't your broker remind you?

Because most brokers and AMCs make money from your trading frequency, not your tax efficiency. Tax harvesting is one of the few activities where YOUR interest doesn't align with theirs.

Bottom line

A 30-minute workflow in mid-March each year can save you ₹12,500-40,000 in current-year tax. Over a 30-year investing career, that's potentially ₹15-20 lakhs of saved tax — enough to fund a small retirement bucket entirely.

The WealthWise app automates this — every March it identifies which units to harvest in which order, executes via your broker, and confirms the realised gain stayed under ₹1.25L. But even without an app, this is a worthwhile 30 minutes once a year.

Run the tax harvesting calculator →