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

The ₹1.25 lakh LTCG exemption resets every April 1. If you do not use it in a financial year, it does not carry forward. Many investors with equity SIPs running for 3+ years have unrealised LTCG they could redeem and rebuy tax-free each year, raising their cost basis and reducing future tax. On a ₹10 lakh investment held for nearly 6 years at 12% annualised returns, using the exemption in three earlier financial years can save approximately ₹40,625 in tax versus holding and redeeming at the end. Here is the 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 listed equity shares and units that qualify as equity-oriented funds under the statutory test. A generic equity fund-of-funds does not automatically qualify
• 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: 3,500
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 Nearly 6 Years

Assume you invest ₹10 lakh lump-sum in a Nifty 50 index fund in April 2020. At 12% annualised growth for approximately six years, the corpus by March 2026 is about ₹19.74 lakh, with a total gain of about ₹9.74 lakh.

Without annual harvesting:

All ₹9.74 lakh is realised in the redemption year. Tax = 12.5% on (₹9.74L − ₹1.25L) = 12.5% × ₹8.49L = approximately ₹1,06,125

With harvesting in three earlier financial years (FY 2022-23 through FY 2024-25), followed by final redemption in FY 2025-26:

The Section 112A threshold was ₹1 lakh in FY 2022-23 and FY 2023-24. It increased to ₹1.25 lakh for transfers on or after 23 July 2024. The three earlier harvests are therefore ₹1 lakh + ₹1 lakh + ₹1.25 lakh = ₹3.25 lakh. When you finally redeem in March 2026:

Remaining gain after earlier harvests = ₹9.74L − ₹3.25L = approximately ₹6.49L Less FY 2025-26 exemption = ₹1.25L Taxable = approximately ₹5.24L Tax = 12.5% × ₹5.24L = approximately ₹65,500

Approximate tax saved by harvesting: ₹1,06,125 − ₹65,500 = ₹40,625

On a ₹10 lakh investment, that is approximately 4.06% of the original principal saved in tax. The illustration assumes the entire gain qualifies under Section 112A and ignores cess, surcharge, exit loads, stamp duty and NAV movement.

FY Timing: The March 31 Deadline

The redemption transaction must fall within the financial year. For a valid redemption request received before the scheme's applicable cut-off on a business day, that day's NAV generally applies; the later payout date does not decide the financial year in which the redemption occurs. Requests received after the cut-off generally receive the next applicable business day's NAV.

Safe rule of thumb: Do not wait until the final hours of March 31. Check that March 31 is a business day, submit a complete request before the applicable cut-off, and retain the transaction confirmation. If the last day is a holiday, submit it on the preceding business day; payout need not reach your bank account by March 31.

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?

Your spouse can use a separate ₹1.25L threshold for gains on investments genuinely owned and funded from the spouse's independent income or assets. Merely transferring money or units to a spouse without adequate consideration does not necessarily shift the tax benefit: Section 64 generally clubs income and capital gains arising from the transferred asset back into the transferor's income. A gift deed by itself does not prevent clubbing. Review the source of funds and ownership trail before treating the two PANs as providing a combined ₹2.5L threshold.

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 manageable year-end 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 with enough time before March 31.

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