Tax harvesting can save money—but it can also derail your portfolio

mutual funds (MFs) up to ₹1.25 lakh in a financial year without paying tax. Capital losses can also be used to offset gains and reduce tax liability.

However, advisors say investment decisions should be driven primarily by portfolio strategy rather than tax calculations alone.“Tax harvesting should be a byproduct of portfolio decisions, and not vice versa,” said Vinit Iyer, principal officer at Prudeno Wealth, an investment advisory firm.“Say, you want to stop investing in a fund as part of portfolio rebalancing, and replace it with a new fund. In this case tax harvesting can be used strategically when you redeem from the first fund and reinvest into the replacement fund in your portfolio.”Tax harvesting can become counterproductive when investors rush to book gains simply to use the annual exemption limit.

While realizing gains up to ₹1.25 lakh tax-free may look attractive, it often requires selling a large portion of the investment.Consider this example. Suppose an investor bought 10,000 units of an equity MF two years ago at a net-asset value (NAV) of ₹150, investing ₹15 lakh.

The current NAV is ₹170, taking the portfolio value to ₹17 lakh. The gain per unit is ₹20.If the investor wants to realize gains of ₹1.25 lakh, they will need to redeem 6,250 units (units to redeem = target gain ÷ gain per unit).

Redeeming 6,250 units at the current NAV of ₹170 would mean withdrawing about ₹10.6 lakh—even though the investor is only booking a ₹1.25 lakh gain.This means a large portion of the portfolio temporarily moves out of the market.The next challenge is reinvestment. Investors often delay putting the money back or try to time the market, said Iyer.“I have seen situations where investors complete a harvesting transaction but