NRI Tax-Loss Harvesting in India: How to Cut Your Tax Bill Before March 31

You sold an equity fund in September and the gain was Rs 3,00,000. The fund house deducted TDS at 12.5% on the long-term portion before it credited your account. Somewhere else in the portfolio is a debt fund bought three years ago that is sitting at a Rs 1,50,000 loss. That loss is doing nothing for you right now, but if you redeem it before March 31 it will absorb half of that gain, cutting the taxable amount and shrinking the tax refund you have to wait months for. The window closes on the last day of the financial year.

Tax-loss harvesting is the deliberate act of selling investments in a loss position before year-end specifically to generate a tax-deductible capital loss, which then offsets capital gains elsewhere in the portfolio. For NRIs investing in India, the mechanics are unusually friendly: India has no wash-sale rule, so you can sell and immediately re-buy the same fund; losses can be carried forward for eight years if there are no gains to absorb them this year; and the set-off rules are broad enough to let a debt fund loss reduce an equity fund gain. The complication that makes it messier for NRIs than for residents is TDS: the fund house deducted tax on your redemption proceeds even for the loss transaction, and getting that money back means filing correctly.

The 30-second answer: Before March 31, identify positions sitting at a capital loss and redeem them. A short-term capital loss (STCL) offsets both short-term capital gains (STCG) and long-term capital gains (LTCG). A long-term capital loss (LTCL) offsets only LTCG, not STCG. Losses not absorbed this year carry forward for 8 assessment years, but only if you file ITR-2 by July 31. India has no wash-sale rule, so you can re-buy the same fund the next day and keep the position. TDS is deducted on your redemption even when you book a loss. Reclaim the excess by filing ITR-2 with the correct capital gains computation. The worked example below shows an NRI with Rs 3,00,000 LTCG on equity funds and Rs 1,50,000 LTCL on a debt fund arriving at a net taxable LTCG of Rs 25,000 and a meaningful TDS refund.

Tax-loss harvesting is not a fringe technique for large portfolios only. Any NRI with equity mutual funds, debt funds, or listed shares that have drifted into loss territory near year-end has the raw material to use it. The math is simple. The rules are clear. The discipline required is logging in once before March 31 and making deliberate redemptions rather than letting the positions sit.

What the Indian capital gains rules actually say about set-off

The Income-tax Act sets the hierarchy in Sections 70 and 71, and two rules govern everything.

Rule 1: Short-term capital losses are the more flexible instrument. A STCL can be set off against STCG from any asset class in the same financial year. It can also be set off against LTCG from any asset class in the same year. So a short-term loss on a debt fund can reduce both a short-term equity gain and a long-term equity gain. This makes STCL the more useful loss type, and if you have a choice between booking a short-term loss or a long-term loss, the short-term loss has a wider range of targets.

Rule 2: Long-term capital losses have one target only. A LTCL can only be set off against LTCG. It cannot touch STCG. So if you have only short-term gains this year, an LTCL is useless for the current year and must be carried forward. This is the rule that catches investors by surprise: the debt fund held for three years produces LTCL on redemption, but if all your equity redemptions this year were held for less than 12 months and therefore generate STCG, the LTCL cannot absorb any of it.

The holding periods that determine the category. For equity mutual funds and listed equity shares, the line is 12 months: held 12 months or less is short-term, held more than 12 months is long-term. For debt mutual funds, unlisted shares, and most other assets, the line is 24 months for debt funds (after the 2023 amendment removing indexation) and 36 months for unlisted shares. The category of the loss depends on the holding period of the position you are selling, not the holding period of the gain you are trying to offset.

Tax rates, which determine how much a loss saves. STCG on equity funds is taxed at 20% (revised from 15% in Budget 2024). LTCG on equity funds above Rs 1,25,000 is taxed at 12.5%. The Rs 1,25,000 exemption applies only to LTCG on equity and equity-oriented funds. Debt fund gains are taxed at slab rates for both short-term and long-term gains, so for most NRIs the effective rate is 30% plus applicable surcharge and cess. An LTCL from a debt fund that offsets LTCG on equity funds saves tax at 12.5%. The same LTCL offsetting a future debt fund LTCG saves it at 30%. The loss is the same rupee amount in both cases; the rupee tax saved differs based on what it absorbs.

The 8-year carry-forward rule, and the July 31 condition that matters more than the loss itself

When losses exceed gains in a financial year, or when you have losses and no gains at all, the unabsorbed losses carry forward to the next 8 assessment years. That is a meaningful window: a loss booked in FY 2025-26 (AY 2026-27) can reduce gains through AY 2034-35. If markets recover and you eventually book large gains, losses sitting from prior years reduce the tax bill. The carry-forward is automatic in the sense that you do not have to make an election, but it is conditional on one procedural step that many NRIs miss.

You must file ITR-2 by the due date of July 31 to preserve the carry-forward right. Section 80 of the Income-tax Act is explicit: a loss that is eligible for carry-forward is forfeited if the return is not filed by the due date. The operative word is due date, not some extended date under a notification. Filing belated returns (after July 31 but before December 31 of the assessment year) does not preserve the carry-forward. The loss happened. The computation is correct. But the legal right to carry it forward is extinguished.

This creates a perverse trap for NRIs who file late or skip filing because they believe no tax is payable. Suppose you harvested Rs 2,50,000 of LTCL in FY 2025-26, had no offsetting gains, and expected to use those losses in FY 2026-27 when you plan to sell a large equity position. If you file the FY 2025-26 return after July 31, 2026, those Rs 2,50,000 of losses are gone. The FY 2026-27 gain has no prior-year losses to absorb. The tax that could have been deferred or saved is now fully due. Filing on time, even in a loss-only year with zero tax payable, is not optional. It is the mechanism by which you preserve what the strategy created.

The wash-sale rule India does not have

US NRIs are trained to think around the wash-sale rule because it is one of the most consequential constraints on American tax-loss harvesting. IRC Section 1091 disallows a loss on the sale of a security if you buy a substantially identical security within 30 days before or after the sale. The practical effect is that you cannot sell a fund, book the loss, and buy the same fund back immediately; you have to wait 30 days or buy a similar but not identical fund, accepting some tracking error.

India has no equivalent rule. The Income-tax Act does not contain a wash-sale provision. You can redeem units of Fund A on March 29, book a valid capital loss, and purchase Fund A again on March 30 or April 1. The loss is real, the set-off works, and the new purchase establishes a fresh cost basis at the lower price. There is no waiting period and no requirement to switch to a different fund scheme.

This matters for portfolio construction. It means tax-loss harvesting in India is low-disruption: you exit the position long enough to lock in the loss, re-enter immediately at the same price, and continue holding the same fund. There is no forced tracking error from substituting one fund for a similar one. The only cost is the exit load (typically 1% for equity funds if held less than 12 months, nil after that) and the minor bid-ask impact on very large positions.

The important exception: US persons. If you are an NRI who is also a US citizen or Green Card holder, or a US resident on a visa who qualifies as a US tax person, the US wash-sale rule applies to your US tax return even for Indian securities. The loss may be valid on your Indian ITR-2 but disallowed on your US Schedule D, and you will need to track the two computations separately. Your US cost basis carries forward the disallowed loss rather than eliminating it permanently, but the timing benefit is lost. This is one of several reasons US-connected NRIs face meaningfully different trade-offs in Indian equity, covered in the capital gains tax guide for NRI shares and mutual funds.

How TDS works when you redeem at a loss, and why it is not the disaster it looks like

This is the part of tax-loss harvesting that frustrates NRIs the most. When you redeem a mutual fund, the registrar and transfer agent or fund house deducts TDS on the transaction before crediting your account. For equity funds, the TDS rates are 20% on STCG and 12.5% on LTCG. For debt funds and other assets, TDS is at 30% on the gross gain for NRIs.

The problem is that the fund house does not know your cumulative portfolio position. It sees one redemption transaction. It does not know about the LTCG you booked six months earlier, the losses you are carrying forward from last year, or the other redemptions you made in March. It applies TDS mechanically to the gain on this redemption alone, with no netting. And here is the specific issue with loss transactions: if you redeem a fund that is at a gain on a per-unit basis, TDS is deducted on that gain even if your overall portfolio is in a net loss position. Conversely, if the specific fund you redeem is at a loss, the TDS may be nil on that redemption, but you have already had TDS deducted on your earlier gain transactions with no offset applied.

The resolution is not instant. You file ITR-2, declare all redemptions, compute the correct capital gains after set-offs and exemptions, arrive at the actual tax due, and claim credit for all TDS deducted. The refund of excess TDS flows to your pre-validated bank account, typically 3 to 6 months after filing, assuming the return is processed without scrutiny. You need a valid PAN, linked Aadhaar, and a pre-validated NRE or NRO bank account in the ITR portal. Interest on the refund at 6% per annum under Section 244A applies if the refund is delayed beyond specified timelines, which in practice means large refunds take longer but at least accrue interest.

For large portfolios, NRIs can apply to the Assessing Officer for a lower TDS certificate under Section 197 before the redemption, which instructs the fund house to deduct at a lower rate or nil. This requires filing an application with supporting computation showing the likely net gain after set-offs. The process takes 4 to 8 weeks, so it must be planned well before March 31, not initiated in the final week of the financial year. For most NRIs with moderate-sized portfolios the refund route is simpler than the Section 197 certificate route, but for someone facing TDS in the tens of lakhs, the upfront application is worth the effort to preserve cash flow. The TDS mechanics are covered in detail at TDS for NRIs and refunds and NRI mutual fund TDS on redemption.

Worked example: Rs 3 lakh LTCG on equity, Rs 1.5 lakh LTCL on debt

This is a realistic situation for an NRI who invested in both equity funds and debt funds a few years ago and is now doing a March-end review.

The portfolio going into March:

The investor holds two positions at a gain or loss:

• Equity fund A, purchased in February 2024, held more than 12 months, current unrealised LTCG of Rs 3,00,000. Redemption was done in January 2026.
• Debt fund B, purchased in December 2022, held more than 24 months, current unrealised LTCL of Rs 1,50,000. Not yet redeemed.

Step 1: Redeem debt fund B before March 31.

The investor redeems debt fund B in March 2026, locking in the Rs 1,50,000 LTCL. The fund house sees a loss transaction. TDS on this redemption is nil because there is no gain on this particular transaction.

Step 2: Compute the net LTCG for FY 2025-26.

The investor already received Rs 3,00,000 LTCG from the equity fund in January 2026. The fund house deducted TDS at 12.5% on that redemption, so Rs 37,500 was withheld before the proceeds arrived.

LTCG from equity fund: Rs 3,00,000 LTCL from debt fund: Rs 1,50,000 (set-off is valid: LTCL can offset LTCG from any asset class) Net LTCG after set-off: Rs 1,50,000

Step 3: Apply the Rs 1,25,000 exemption on equity LTCG.

The Rs 1,25,000 annual exemption under Section 112A applies to net LTCG on equity and equity-oriented funds. Here the net LTCG of Rs 1,50,000, all from the equity fund (since the debt LTCL offsets part of it), qualifies.

Net LTCG: Rs 1,50,000 Exemption: Rs 1,25,000 Taxable LTCG: Rs 25,000

Step 4: Compute the final tax.

Tax at 12.5% on Rs 25,000: Rs 3,125 Health and education cess at 4%: Rs 125 Total tax payable: Rs 3,250

Step 5: Compute the TDS refund.

TDS already deducted (on the January equity redemption): Rs 37,500 Tax actually due: Rs 3,250 Refund due: Rs 34,250

Without the loss harvesting in March, the tax computation would have been:

LTCG: Rs 3,00,000 Exemption: Rs 1,25,000 Taxable: Rs 1,75,000 Tax at 12.5%: Rs 21,875 Cess: Rs 875 Tax without harvesting: Rs 22,750 TDS already deducted: Rs 37,500 Refund without harvesting: Rs 14,750

The tax-loss harvest saved Rs 19,500 in taxes (Rs 22,750 minus Rs 3,250) and increased the refund from Rs 14,750 to Rs 34,250. The investor also immediately re-bought debt fund B at the same price, reset the cost basis, and continues holding the same position. If markets recover and debt fund B goes into a gain later, the new, lower cost basis means future gains will be larger, and the clock on the 24-month holding period for long-term treatment restarts from the repurchase date.

What happens to the unabsorbed portion if the numbers were different? Suppose the LTCL was Rs 4,00,000 and the LTCG was Rs 3,00,000. After full set-off, the residual Rs 1,00,000 of unabsorbed LTCL carries forward to the next 8 assessment years, provided the investor files ITR-2 by July 31, 2026.

How to report this in ITR-2

NRIs file ITR-2 for capital gains income. Residents who only have salary and house property income can file ITR-1 (Sahaj), but NRIs are excluded from ITR-1 and must use ITR-2. The capital gains schedule in ITR-2 requires you to report each transaction separately, including the acquisition date, cost of acquisition, sale date, and sale proceeds. The system computes gains and losses from your entries and applies the set-off rules automatically across the schedules.

Key sections in ITR-2 for this exercise:

Schedule CG (Capital Gains): Report all equity fund and debt fund redemptions with dates and amounts. Short-term transactions go in the STCG sub-schedule; long-term transactions go in the LTCG sub-schedule. The Rs 1,25,000 LTCG exemption on equity is applied in the LTCG 112A section.

Schedule CYLA (Current Year Loss Adjustment): This is where current-year set-offs happen. The system takes your STCL and LTCL from Schedule CG and allows set-off against gains in the sequence the law prescribes.

Schedule BFLA (Brought Forward Loss Adjustment): If you are using losses carried forward from prior years, they appear here and are applied against current-year gains after current-year set-offs.

Schedule CFL (Carry Forward of Losses): Unabsorbed losses that are carried forward to future years are listed here. Check this schedule before filing to confirm the number matches what you expect.

Schedule TDS (TDS credit): Report all TDS deducted by fund houses. Match this to Form 26AS and AIS in the income tax portal. If a TDS entry in Form 26AS does not match your records, do not ignore it: a mismatch delays the refund or triggers a notice.

The capital loss set-off and carry-forward guide has a schedule-by-schedule walkthrough of the ITR-2 entries. The NRI mutual fund switch and STP taxable event guide covers an adjacent trap: switching between plans of the same fund or running an STP triggers a capital gains event on each transaction, which feeds into the same Schedule CG.

What to do in the last two weeks of March

This is a practical checklist, not an aspirational one.

Pull the capital gains statement from each fund house and broker. Most AMCs have a downloadable statement in the online portal or CAMS/KFintech consolidated view. It shows unrealised gains and losses by fund and by purchase date. You need this to identify which positions are in loss and whether those losses are short-term or long-term.

Match the loss type to your gain type. LTCL can only offset LTCG. STCL can offset both. If you have only STCG this year, an LTCL harvest does nothing for FY 2025-26 and goes to carry-forward, which is still worthwhile if you plan future large LTCG. If you have LTCG, an LTCL harvest reduces it directly.

Check exit loads before redeeming. Equity funds typically charge 1% exit load if redeemed within 12 months of each purchase. If the fund is in loss and also within the 12-month window, you are paying an exit load to harvest a short-term loss. The exit load reduces the net redemption proceeds and therefore the loss amount, so compute the net loss after exit load before deciding to redeem.

Plan the re-buy for the next business day. There is no wash-sale constraint, but settlement takes time. Equity mutual fund redemptions in India typically settle in T+2 or T+3 business days. You receive cash, then use it to re-buy. If you want continuous market exposure with no gap, some investors use an intraday switch to a very short-duration liquid fund as a parking spot while the redemption settles. This is a minor operational detail, but for large positions where a gap day in a volatile market matters, it is worth thinking through.

File ITR-2 by July 31. Write it down. Set a reminder. Do not assume a tax consultant will remind you. The July 31 date is the condition on which the entire carry-forward strategy rests.

The closing read

Tax-loss harvesting before March 31 is one of the few legal and purely mechanical ways an NRI investor can reduce the tax bill on capital gains. The rules are clear, the execution is straightforward, and India's absence of a wash-sale rule removes the main complication that makes the same strategy messy in the US. The most common reason NRIs do not do it is that they do not review the portfolio before March 31; they think about it in April when it is too late.

The two conditions that make the strategy work are: redeeming the loss positions before the financial year closes, and filing ITR-2 by July 31 to either apply the losses against current-year gains or preserve them as a carry-forward. Miss either and the strategy either delivers partial value or none. The TDS deducted along the way is not a sunk cost; it is a refund in transit, and the refund comes back larger when the harvest is done correctly.

One structural note worth repeating: the set-off rules are broad (an LTCL from a debt fund offsets an LTCG from an equity fund) but not unlimited (an LTCL cannot offset STCG). Know the type of each loss and the type of each gain before deciding which positions to harvest. If the types do not match, the harvest still creates a carry-forward, which has value over the 8-year window as long as July 31 is respected.

The effort required is one portfolio review session and one ITR-2 filing. The return is a reduced tax liability, a larger refund, and a clean set of carry-forward losses that may absorb significant gains in a recovery year.

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Related guides:

• Capital gains tax for NRIs: shares and mutual funds
• Capital loss set-off and carry-forward for NRIs
• TDS for NRIs and refunds
• NRI mutual fund TDS on redemption
• Tax-efficient investing for NRIs
• NRI tax-aware portfolio rebalancing
• NRI mutual fund switch and STP as a taxable event
• NRI mutual funds eligibility
• Direct equity vs mutual funds for NRIs
• NRI debt funds vs bank FD after 2023
• NRI annual portfolio review checklist
• Buying Indian stocks via PIS
• NRE, NRO and FCNR accounts
• NRI investing mistakes to avoid

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Disclaimer: This guide is for general information only and does not constitute tax or investment advice. Capital gains rules, TDS rates, and ITR filing requirements change with each Finance Act. Verify current rates with a qualified Chartered Accountant before acting. NRIs with tax obligations in their country of residence should also consider home-country treatment of Indian capital gains, particularly US persons subject to PFIC rules and the US wash-sale rule, and UK residents subject to the arising basis of taxation.