The ₹1.25 lakh tax-free rule most investors waste every year

Indian tax law gives every equity investor a quiet gift: the first ₹1.25 lakh of long-term capital gains each financial year is completely tax-free.

Most investors never use it. They hold for 10 years, sell once, and pay 12.5% on a decade of gains — having wasted nine years of free exemption.

The fix is called tax harvesting, and it takes one afternoon a year:

1. In March, check your equity funds and shares held over 12 months.
2. Sell enough to book up to ₹1.25 lakh of gains — no tax.
3. Buy the same investment back the next day. Your portfolio is unchanged, but your purchase cost has reset higher.

That reset matters: when you finally sell years later, the taxable gain is measured from the new, higher cost. Done every year, you legally save up to ₹15,625 annually — over ₹1.5 lakh across a decade, compounding in your favour the whole time.

Two cautions: mind exit loads (most equity funds charge 1% under one year, so harvest old units), and remember the exemption is use-it-or-lose-it — it doesn't carry forward.

Ask PaisaGuru "explain tax harvesting" anytime — it'll walk you through it in your language.

Educational content, not investment or tax advice. Consult your CA for your specific situation.