Your Questions Answered: How does tax-loss harvesting work and can it minimise my tax outgo?

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Also Read: How to reduce income tax by loss harvesting in weak stock market — explained Tax-loss harvesting allows you to maintain the desired asset allocation while still taking advantage of tax benefits. It provides a two-fold benefit: You may set off short-term capital losses against short-term capital gains or long-term capital gains.

However, you can set off long-term capital losses only against long-term capital gains. For example, if you have a ₹1,000 short-term capital loss and a ₹1,500 short-term capital gain, you can offset the losses against the gains and only pay taxes on the net gain of ₹500.

Also Read: How to set off capital losses in stock market to reduce your income tax liability? For instance, if you incur a ₹2,000 long-term capital loss and have a ₹3,000 long-term capital gain, you can offset the gains by the losses, resulting in a net taxable gain of ₹1,000.

If you have both short-term and long-term capital losses and gains, you can offset short-term losses against short-term gains and long-term losses against long-term gains. If there's still a net loss or gain after offsetting within the same category, you can then offset any remaining net short-term loss against any remaining net long-term gain, or vice versa.

Usually, tax loss harvesting is done towards the end of the tax year to review investment positions and strategically sell assets to optimise the tax situation before year-end. During years when your income is higher than usual, tax loss harvesting can be used to offset capital gains and potentially reduce your taxable income.

If you have unused capital losses from previous years, tax loss harvesting can be employed to offset gains and fully utilise any carried-forward losses. When overall