LTCG ₹1.25 Lakh Exemption: How to Use It Every Year

The ₹1.25 lakh LTCG exemption resets every April 1 — and if you do not actively harvest it, the exemption is gone permanently. Most investors with equity SIPs running 3+ years are sitting on unrealised LTCG they could redeem and rebuy tax-free each year, permanently lowering their future tax liability. On a ₹10 lakh investment held 5 years at 12% returns, harvesting annually saves ₹62,500 in tax versus holding and redeeming at the end. Here is the exact strategy, the timing rules, and when it stops being worth the effort.

What the Exemption Actually Is

Section 112A of the Income Tax Act provides that Long-Term Capital Gains on equity-oriented mutual funds (and listed equity shares) up to ₹1,25,000 per financial year are exempt from tax. Gains above this threshold are taxed at 12.5%.

Key constraints:

• The ₹1.25L limit is aggregate across all equity investments — equity MFs, direct stocks, equity ETFs, equity FOFs
• It is per financial year (April 1 to March 31)
• It does not carry forward — unused exemption in FY 2025-26 cannot be applied in FY 2026-27
• It applies only to LTCG — Short-Term Capital Gains (STCG) on equity are taxed at 20% flat with no exemption slab

If you have ₹3 lakh of LTCG in FY 2025-26 and do nothing, you pay 12.5% on (₹3L − ₹1.25L) = ₹21,875 in tax. If you had harvested ₹1.25L the previous year too, your cost basis would be ₹1.25L higher, reducing the FY 2025-26 gain to ₹1.75L — tax of 12.5% on (₹1.75L − ₹1.25L) = ₹6,250. Savings: ₹15,625 — every year.

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The Harvest-and-Rebuy Strategy

Step 1: Calculate your unrealised LTCG

From your CAMS/KFintech consolidated statement, identify the equity fund units you have held for more than 12 months. For each folio, the LTCG = (Current NAV − Purchase NAV) × Units held for 12+ months.

Step 2: Redeem just enough units to realise ₹1.25L of gain

If your total unrealised LTCG is ₹4.5 lakh, you do not need to redeem everything. You only redeem the units needed to book exactly ₹1,25,000 of gain.

Example:
Fund: Parag Parikh Flexi Cap Fund - Direct
Units held 12+ months: 500
Purchase NAV (weighted average): ₹60
Current NAV: ₹100
Unrealised LTCG per unit: ₹40
Units to redeem for ₹1.25L gain: ₹1,25,000 / ₹40 = 3,125 units

Step 3: Immediately rebuy the same fund at current NAV

On the same day or the next trading day, purchase the same amount (₹1.25L + the original cost of units redeemed, i.e., the full redemption proceeds) back into the same Direct plan fund. Your new cost basis is the current NAV — significantly higher than your original purchase price.

What you have achieved: You have realised ₹1.25L of LTCG tax-free. Your new cost basis is higher. The total units held returns to approximately the original (minor difference due to NAV movement between redemption and repurchase).

The Slab Math Over 5 Years

Assume you invest ₹10 lakh lump-sum in a Nifty 50 index fund in April 2020. It grows at 12% per year. By March 2026 the corpus is approximately ₹17.6 lakh, with total LTCG of ₹7.6 lakh.

Without annual harvesting:

All ₹7.6 lakh is taxable in the redemption year. Tax = 12.5% on (₹7.6L − ₹1.25L) = 12.5% × ₹6.35L = ₹79,375

With annual harvesting from April 2021 onwards (4 harvest cycles, FY 2022-23 through FY 2025-26):

Each year you harvest ₹1.25L of LTCG tax-free. After 4 years, your cost basis has been stepped up by approximately ₹5 lakh (4 × ₹1.25L). When you finally redeem in March 2026:

Effective taxable LTCG = ₹7.6L − ₹5L previously harvested = ₹2.6L Less current year exemption = ₹1.25L Taxable = ₹1.35L Tax = 12.5% × ₹1.35L = ₹16,875

Total tax saved by harvesting: ₹79,375 − ₹16,875 = ₹62,500

On a ₹10 lakh investment, that is 6.25% of principal saved in tax — purely by executing a two-step transaction once a year.

FY Timing: The March 31 Deadline

The harvest must be completed (redemption processed and settled) before March 31. Equity mutual fund redemptions settle at T+2 business days. If March 31 is a Tuesday, the last safe day to place a redemption for FY settlement is March 27 (Friday) — to clear T+2 before month-end.

Safe rule of thumb: Place your harvest redemption by March 25 each year. This gives T+2 settlement plus a buffer for any SEBI-mandated settlement extensions or fund-specific delays.

The rebuy does not have a deadline — you can rebuy in April of the next FY if you prefer. The cost basis step-up is effective from the rebuy date, not the redemption date.

Is There a Bed-and-Breakfast Restriction?

In the UK, the "bed and breakfast" rule prevents you from counting a loss on a sale if you rebuy the same security within 30 days. India does not have an equivalent provision for mutual funds or listed equity as of FY 2025-26. There is no mandatory waiting period between redemption and repurchase of the same fund. You can redeem and rebuy on the same day.

The only caution: if you are booking LTCG on units of a specific fund and want to claim those units as "long-term" again going forward, the new purchase date starts from the rebuy date — the original purchase date does not carry over.

When Harvesting Is NOT Worth Doing

Scenario 1: Your total LTCG across all equity holdings is below ₹1.25L

If you have not accumulated ₹1.25L of unrealised LTCG in long-term equity holdings, there is nothing to harvest. This is common for investors in the first 2–3 years of their equity portfolio. No action needed.

Scenario 2: Your LTCG is ₹1.26L — harvest, but barely

If unrealised LTCG is only ₹1.26L, you save 12.5% on ₹1,000 = ₹125. The transaction cost and effort (login, redemption, repurchase, updating records) may exceed the benefit. Use your judgment.

Scenario 3: You have carry-forward LTCG losses from previous years

If you have carry-forward LTCL from a prior year (e.g., you sold equity at a loss during a market crash and filed the loss in your ITR), those losses offset current-year LTCG. In this case, the ₹1.25L exemption applies to whatever gain remains after loss offset. Do the harvesting math accounting for your carry-forward losses.

Scenario 4: You are in the Exit Load period

Most equity mutual funds charge a 1% exit load for redemptions within 12 months. Harvesting within 12 months (STCG units) costs you both the exit load and 20% STCG tax — never do this. Only harvest units that are both (a) older than 12 months (long-term) AND (b) past the exit load period. Exit loads are typically zero after 12 months for most equity funds, but check the scheme information document.

Practical Tracking: What You Need

1. CAMS/KFintech Consolidated Gains Statement: Download this before March each year. It shows unrealised LTCG by folio with purchase dates. Available on cams.online and kfinclient.com.

2. LTCG Harvesting Calculator (below): Input your folios and it calculates exact units to redeem for ₹1.25L harvest.

3. ITR filing: Report the harvested LTCG in Schedule CG. Claim the ₹1.25L exemption. Even tax-free gains must be disclosed.

[LTCG Harvesting Calculator]

SIP Investors: FIFO Applies

For SIP investors, when you redeem units, the redemption follows FIFO (First In First Out) — the oldest units are redeemed first. This means your first harvest will use the oldest SIP instalments, which typically have the highest unrealised gain per unit. Over time, as older units are harvested and rebought at higher NAVs, the FIFO pool gradually shifts toward higher-cost-basis units.

Implication: the annual harvest becomes increasingly efficient over time, because the cost basis in the pool keeps rising.

FAQ

Can I harvest from multiple funds to make up ₹1.25L total?

Yes. The ₹1.25L is an aggregate limit across all equity LTCG in the FY. You can harvest ₹60,000 from Parag Parikh Flexi Cap and ₹65,000 from a Nifty 50 index fund in the same year. The combined harvest is ₹1.25L, fully exempt. Ensure the total does not exceed ₹1.25L — the excess is taxable at 12.5%.

My spouse also has equity holdings. Can she harvest her own ₹1.25L separately?

Yes. The ₹1.25L exemption is per PAN. If your spouse has her own folios under her PAN, she gets a separate ₹1.25L exemption. Joint harvesting across two PANs effectively doubles the tax-free harvest to ₹2.5L per year. Units must genuinely be held in each person's name — you cannot transfer units between spouses for this purpose without a gift deed, which has its own tax implications.

I missed harvesting for 3 years. Should I now harvest ₹3.75L all at once?

No. The ₹1.25L exemption is per financial year. You cannot retroactively claim past years' exemptions. You can only use ₹1.25L in the current FY. If you have ₹4.5L of accumulated LTCG, you can harvest ₹1.25L now (current FY), then another ₹1.25L in April of the next FY (start of new FY), and so on. Spreading the harvest over multiple years is the correct approach. See the MF Taxation hub for the full gain calculation context.

The annual harvest is a 30-minute task once your tracking system is set up. The LTCG Harvesting Calculator above does the unit calculation. The tax return disclosure is a standard Schedule CG entry. The only thing left is placing the redemption and rebuy before March 25.

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