What is tax-loss harvesting in mutual funds?

The idea, plainly

Tax-loss harvesting means selling something at a loss on purpose, so that the loss offsets gains elsewhere and lowers the tax on those gains. It is a legitimate part of the rules, not a loophole. But it only helps if you had gains to offset and a loss you were comfortable realising.

The set-off rules

The rules decide what a loss can cancel:

• A short-term capital loss can be set off against short-term or long-term gains.
• A long-term capital loss can be set off only against long-term gains.
• Capital losses cannot reduce your salary or most other income.

Whatever you cannot use this year can be carried forward for up to eight assessment years, but only if you file your return by the due date. That filing condition is easy to miss and costly to lose.

The honest caveat

Harvesting means actually selling a fund. If that fund still fits your goals, you now have to buy back in, and the market may move in between. So the technique earns its keep mainly when you were going to rebalance anyway, or when a holding no longer suits you. Tax is the bonus, not the reason. If you would like help seeing whether it applies to you, talk to us.