On a ₹25,000 monthly SIP held fifteen years, tax harvesting saves ₹2,13,735 in our model.
Modelled on a SIP starting in April, so each harvesting year lines up exactly with India's 1 April–31 March financial year. Start in another month and your schedule shifts — the mechanism is the same, the figures move.
Whether that is worth the effort depends on your portfolio, your other capital gains, and how consistently you actually do it. But it is real money, and it is roughly a quarter of the tax bill — not the whole thing. "Harvesting saves you the 12.5%" is the most common wrong thing said about it.
Here is the mechanism, the full working, and where it stops helping.
The idea in one paragraph
Long-term gains on equity funds are taxed at 12.5%, but the first ₹1.25 lakh of your aggregate eligible Section 112A long-term gains in a financial year is covered by the annual threshold and carries no tax. If you never sell, you use that allowance exactly once — in the year you finally redeem. If you realise gains against it every year and reinvest, you use it repeatedly. Your holding is unchanged. Your cost basis is now higher, so the taxable gain at the end is smaller.
You are not avoiding tax. You are collecting an allowance that would otherwise expire unused.
The maximum annual shield
₹1,25,000 × 12.5% × 1.04 = ₹16,250 a year
That is the most the threshold can be worth in any single year. Everything below follows from how often you can actually capture it.
What it saves
Same SIP as our worked example: ₹25,000 a month, fifteen years, 10.5% net of a 1.5% expense ratio. Corpus ₹1,09,45,689.
| Tax if you never harvest | ₹8,21,690 |
| Tax if you harvest annually | ₹6,07,955 |
| Saved | ₹2,13,735 |
The year-by-year working
This is the part most articles leave out. Harvested gains are capped at ₹1.25 lakh a year and limited to units held over twelve months.
| Year | Harvested gain | Cumulative |
|---|---|---|
| 1 | ₹0 | ₹0 |
| 2 | ₹52,625 | ₹52,625 |
| 3 | ₹91,486 | ₹1,44,111 |
| 4 | ₹1,25,000 | ₹2,69,111 |
| 5 | ₹1,25,000 | ₹3,94,111 |
| 6 | ₹1,25,000 | ₹5,19,111 |
| 7 | ₹1,25,000 | ₹6,44,111 |
| 8 | ₹1,25,000 | ₹7,69,111 |
| 9 | ₹1,25,000 | ₹8,94,111 |
| 10 | ₹1,25,000 | ₹10,19,111 |
| 11 | ₹1,25,000 | ₹11,44,111 |
| 12 | ₹1,25,000 | ₹12,69,111 |
| 13 | ₹1,25,000 | ₹13,94,111 |
| 14 | ₹1,25,000 | ₹15,19,111 |
| 15 | ₹1,25,000 | ₹16,44,111 |
₹16,44,111 of gains booked without tax. Here is exactly what that does to the final bill.
Cost basis, and why it matters
Your taxable gain at redemption is the corpus minus your cost basis — what the units cost you. Normally that is simply what you invested: ₹45,00,000.
Every time you harvest, you sell units and buy them back at today's higher price. The money you put back is the same, but the recorded cost of the new units is higher. Each harvest raises your cost basis by exactly the gain you booked.
The two calculations, side by side
| No harvesting | Harvesting | |
|---|---|---|
| Corpus | ₹1,09,45,689 | ₹1,09,45,689 |
| Cost basis | ₹45,00,000 | ₹61,44,111 |
| Gain | ₹64,45,689 | ₹48,01,578 |
| Less ₹1.25 L threshold | ₹63,20,689 | ₹46,76,578 |
| Tax at 12.5% | ₹7,90,086 | ₹5,84,572 |
| Plus 4% cess | ₹8,21,690 | ₹6,07,955 |
Step by step on the harvesting column:
- Cost basis: ₹45,00,000 + ₹16,44,111 harvested = ₹61,44,111
- Gain: ₹1,09,45,689 − ₹61,44,111 = ₹48,01,578
- Taxable: ₹48,01,578 − ₹1,25,000 = ₹46,76,578
- Tax: ₹46,76,578 × 12.5% = ₹5,84,572
- With cess: ₹5,84,572 × 1.04 = ₹6,07,955
Saving: ₹8,21,690 − ₹6,07,955 = ₹2,13,735.
A check you can do in one line
The whole exercise reduces the taxable gain by exactly the amount harvested. So the saving should equal the harvested gains times the tax rate:
₹16,44,111 × 12.5% × 1.04 = ₹2,13,734
Within a rupee of the figure above, the difference being rounding. If those two did not match, something in the model would be wrong.
Post-tax corpus: ₹1,03,37,734 instead of ₹1,01,24,000.
Why it isn't 14 × ₹16,250
A fair question, since fourteen harvesting years at the maximum shield would be ₹2,27,500.
Two things reduce it. Year one produces nothing — no units are twelve months old yet. Years two and three produce only partial harvests, because the eligible pool is smaller than ₹1.25 lakh. Only twelve of the fifteen years capture the full allowance.
From year four onward the eligible pool comfortably exceeds ₹1.25 lakh — by year fifteen it is over ₹49 lakh — so the cap, not availability, is the binding constraint.
Why it is not "saving 12.5%"
The rate never changes. What changes is how much gain is exposed to it.
Harvesting removes about 26% of the tax. The remaining ₹48 lakh of gain is still subject to the same 12.5% rate plus cess — before any losses, set-offs or other provisions that apply to you. Anyone telling you it eliminates the 12.5% is describing something that does not exist.
How to work out how much to sell
You want to realise ₹1.25 lakh of gain, not sell ₹1.25 lakh of value. The difference is large.
If units bought at ₹100 are now worth ₹160, then 62.5% of any redemption is your original cost and 37.5% is gain. Selling ₹1,00,000 realises ₹37,500 of gain.
To realise the full ₹1.25 lakh, you would need to redeem about ₹3,33,333.
Only units held more than twelve months qualify, and redemptions follow FIFO — oldest units first.
What it costs you
Time out of the market. Equity scheme redemption proceeds settle on T+2, and your repurchase happens at whatever NAV applies then, not the NAV you sold at. Usually a small gap. Occasionally the market moves, either way. This is the main real cost.
Exit load. Many equity schemes charge no exit load once the applicable holding period has passed, but both the period and the charge vary by scheme — check your scheme's current terms. If there is a load, harvesting can cost more than it saves.
STT. 0.001% on redemption of equity-oriented units — tiny against a ₹16,250 annual shield, but include it when you run a real transaction rather than a model.
Your attention. Fourteen sittings across fifteen years. The saving is real; so is the fact that most people will do this twice and stop.
Four things that limit it
The threshold is aggregate. ₹1.25 lakh applies across all your eligible Section 112A gains in a year — STT-paid equity shares, equity-oriented funds and business trust units together. If you sold stock this year, you are drawing on the same pot.
The early years give you only part of it. You need units older than twelve months carrying meaningful gains. In this model year two yields ₹52,625 and year three ₹91,486. The first year the full ₹1.25 lakh is available is year four.
Selling beyond the threshold defeats the purpose. Eligible gains above ₹1.25 lakh in a year are generally taxable at 12.5%, subject to any losses, set-offs and other provisions that apply to you. Harvesting is a ceiling, not a selling strategy.
It only helps if there is a large gain to shelter. If your final gain was going to fall under ₹1.25 lakh anyway, there is nothing to harvest.
Harvesting is not a reason to sell
Worth saying plainly. This is useful when you already intend to hold long term and have unrealised gains sitting idle against an expiring allowance. It is not a reason to disturb an allocation that is working.
Before doing it for real, check your aggregate Section 112A gains for the year, any capital losses available to set off, your scheme's exit load, and when the repurchase will actually execute.
Is it worth it?
₹2,13,735 for fourteen sittings of twenty minutes is a good rate for your time — if you keep it up.
Hold it in proportion, though. Under the same assumptions as our earlier article, moving from the assumed regular-plan cost structure to the assumed direct-plan one is worth ₹5,99,622 on this SIP — nearly three times as much, from one decision rather than fourteen. Increasing the monthly amount as income grows beats both comfortably.
Harvesting is the last few percent, not the main event. Do it after the bigger levers, not instead of them.
The SIP Calculator gives you the un-harvested side of this — your corpus, the expense-ratio drag, the LTCG tax and the inflation-adjusted figure. That is the ₹8,21,690 column.
The harvesting schedule above is not in the calculator yet. It is modelled here by hand. If that is something you would use, say so and I will build it.
Assumptions and sources
- ₹25,000 monthly, 180 instalments at the start of each month, 10.5% annual net return compounded monthly, full redemption after the final instalment. Same basis as the linked anchor article.
- Harvesting modelled as: at the end of each 12-month block from year two, sell units held over twelve months to realise up to ₹1.25 lakh of gain and repurchase immediately at the same NAV. The model assumes the SIP begins in April, so each 12-month block corresponds exactly to an Indian financial year (1 April–31 March) and each harvest falls in the right tax year. For a SIP starting in another month, the first harvesting window is shorter and the whole schedule shifts; the mechanism is unchanged but the yearly figures differ.
- Exit load, STT and NAV movement between redemption and repurchase are not modelled.
- Rules used: Section 112A long-term capital gains at 12.5% on aggregate eligible gains above the ₹1.25 lakh annual threshold, no indexation, plus 4% health and education cess, as applicable for FY 2026-27. Rate and threshold per the Finance (No. 2) Act 2024, effective 23 July 2024. Surcharge is not modelled.
- The model assumes no other Section 112A gains or losses in any year.
- Equity scheme redemption payouts moved to T+2 with effect from 1 February 2023 (AMFI).
This article explains arithmetic. It is not tax or investment advice. Your position depends on your total income and other gains — consult a qualified professional before acting.