Can stock market losses offset mutual fund gains? What is tax-loss harvesting strategy, how it works

Investors can sell loss-making stocks to offset eligible capital gains from other assets. Here's whether you can lower your tax liability from mutual fund gains by using stock losses. 

Investors may make profits on mutual fund investments while holding stocks that are trading at a loss. In such cases, selling loss-making stocks could help reduce their tax liability by offsetting capital losses against eligible capital gains.

Short-term capital losses can be set off against both short-term and long-term capital gains, whereas long-term capital losses can be set off only against long-term gains. These rules apply subject to the relevant income-tax provisions.

When can you offset stock losses against MF gains?

Yes, offsetting capital losses from the sale of listed shares is allowed but only against equity-oriented mutual funds.

A mutual fund scheme is classified as an equity mutual fund when it invests more than 60% of its total assets in the equity shares of different companies. The balance amount can be invested in money market instruments or debt securities as per the investment objective of the scheme.

What is tax loss harvesting, how it works?

Tax-loss harvesting is a common strategy in which investors sell investments at a loss to offset eligible capital gains and reduce their tax liability for the financial year. The losses can be used to lower the net taxable capital gains.

Here is how tax loss harvesting works in practice:

Suppose you have earned ₹1,00,000 in short-term capital gains (STCG) by selling equity mutual fund units during a certain financial year. At a tax rate of 20%, you would owe ₹20,000 in tax, excluding applicable surcharge and cess.