Tax loss harvesting can reduce your tax burden by a lot as an NRI. Housing market studies show nearly 30–35% of residential property sales in certain Indian cities happened below inflation-adjusted purchase value in the last decade.
Recent tax changes have pushed investment gains to face higher rates. Short-term capital gains now face a 20% tax (up from 15%) and long-term capital gains face 12.5% (up from 10%). You can employ these market losses to offset your gains strategically. Your capital losses remain valid up to eight assessment years, which gives you flexibility to plan your taxes.
Indian markets have grown approximately 90% in the last year, making tax loss harvesting especially valuable right now. Your diligent implementation of this strategy could save up to Rs10,000 each year in long-term capital gains taxes. This piece explores ways NRIs can minimize their tax liability while growing their investments through tax loss harvesting.
What is Tax Loss Harvesting Strategy for NRIs?
Tax loss harvesting is an opportunistic way NRIs can reduce their tax liability on investments in India. This strategy lets you use losses in your investment portfolio to offset taxable capital gains and minimize your overall tax burden.
Definition of tax loss harvesting in Indian context
Tax loss harvesting in India means selling underperforming investments at a loss and using these realized losses to offset capital gains from profitable investments. You can reduce your taxable income by balancing losses against gains. To cite an instance, selling investments with Rs10,000 in capital gains and Rs6,000 in losses allows you to reduce your taxable gain to Rs4,000.
The Indian Income Tax Act, 1961, sets specific guidelines for handling capital gains and losses. These rules allow both short-term and long-term capital losses to be carried forward for up to 8 assessment years. This creates a valuable "tax asset" you can use in the future.
Applicability of tax loss harvesting for NRIs
NRIs investing in Indian markets pay 20% on short-term capital gains and 15% on long-term capital gains exceeding Rs1 lakh. Tax loss harvesting helps optimize these tax liabilities.
NRIs must understand two critical offsetting rules:
- Short-term capital losses (STCL) can offset both short-term capital gains (STCG) and long-term capital gains (LTCG)
- Long-term capital losses (LTCL) only offset long-term capital gains
Here's a real-life example: You invested Rs200,000 in January 2020 and its value dropped to Rs184,000 by September 2021. Selling creates a long-term capital loss of Rs16,000. This loss can offset future LTCG, saving approximately Rs2,000 in taxes (at 12.5% rate).
Difference between tax harvesting and tax loss harvesting
These terms sound similar but represent different strategies:
Tax harvesting focuses on selling investments to take advantage of tax benefits, including both loss and gain scenarios.
Tax loss harvesting targets selling investments at a loss to offset taxable gains from other investments. This strategy works best when you have substantial capital gains throughout the year because it directly reduces those gains and creates tax savings.
Note that India doesn't have a wash sale rule that prevents immediate repurchase of the same security after booking losses. This gives NRIs more flexibility with tax loss harvesting strategies in their Indian investment portfolios.
How Tax Loss Harvesting Works for NRIs
Tax loss harvesting rules about capital losses and gains can help you reduce your tax burden on Indian investments.
Offsetting STCL against STCG and LTCG
Short-term capital losses (STCL) give you the most flexibility in tax planning. You can use losses from investments sold within 12 months to offset both short-term capital gains (STCG) and long-term capital gains (LTCG). Active investors who book short-term profits often find this feature valuable.
Here's a practical example: You made Rs 6,00,000 in STCG and Rs 15,00,000 in LTCG from listed equity shares. By selling stocks that weren't performing well, you got Rs 2,00,000 in STCL. This tax loss harvesting strategy would cut your tax bill by Rs 40,000.
Offsetting LTCL against LTCG only
Long-term capital losses (LTCL) come with tighter rules. You can only use these losses from investments held beyond 12 months to offset long-term capital gains. Many investors miss this crucial detail.
Carry forward rules: 8-year limit
STCL and LTCL benefits extend through carry-forward options. Indian tax laws let you carry these losses forward up to 8 assessment years if you can't use them fully in the current year. This creates a valuable tax asset you can use later.
Remember, you must file your income tax return on time. Missing the deadline under Section 139(1) means losing your right to carry forward losses, even if they're legitimate.
Wash sale rule for US-based NRIs
US-based NRIs face extra challenges with the wash sale rule. The IRS won't let you claim a loss if you buy the same or similar security 30 days before or after selling it at a loss.
This rule applies to all your accounts, including IRAs and your spouse's accounts. Let's say you sell Company A shares at a loss and buy them back within 30 days - the IRS won't allow that loss for tax purposes.
You can avoid wash sales by buying a different but related security. Switching from an S&P 500 index ETF to a Russell 1000 Index ETF lets you keep market exposure while saving on taxes.
Example Calculation: How Much Tax Can an NRI Save?
Real-life examples show how tax loss harvesting creates value for NRIs. Let's get into how booking losses strategically leads to significant tax savings in actual scenarios.
Scenario 1: Short-term capital gain offset with STCL
An NRI investor earned ₹1,00,000 in short-term capital gains that would normally face a 20% tax of ₹20,000. A portfolio review revealed stocks with unrealized losses of ₹60,000. The investor sold these underperforming assets to offset gains and reduced taxable income to ₹40,000. Their tax burden dropped to ₹8,000, which saved them ₹12,000 instantly.
Scenario 2: Long-term capital gain offset with LTCL
The case of another NRI shows ₹5,00,000 in long-term capital gains from stocks held beyond a year. The taxable amount would be ₹4,00,000 after the ₹1,00,000 exemption, resulting in a 15% tax of ₹60,000. The investor found long-term loss-making stocks worth ₹3,00,000. Selling these stocks brought the taxable gain down to ₹1,00,000 after exemption. This lowered the tax to ₹15,000, saving ₹45,000.
Tax savings before and after harvesting
The investor's original tax burden stood at ₹80,000 without tax loss harvesting. The total tax fell to ₹23,000 after implementing the harvesting strategy - a dramatic 71% reduction. Unused losses can benefit investors for up to eight assessment years as a valuable tax asset.
Reinvestment strategy after harvesting
Portfolio positioning stays intact when you reinvest proceeds right after booking losses. Market experts warn against delayed or partial reinvestment. Markets are unpredictable, and delays often lead to missed opportunities or poor entry points. Success comes from having extra funds ready when repurchase prices differ from selling prices, since mutual fund proceeds might take time to arrive.
Benefits and Considerations for NRIs Using Tax Loss Harvesting
Tax loss harvesting gives NRIs investing in Indian markets several strategic advantages beyond just reducing taxes. The right execution needs careful attention to both benefits and what it all means.
Lower tax liability on Indian investments
Tax loss harvesting provides immediate tax relief by offsetting unlimited capital gains in a year. Any excess losses up to ₹3,000 can offset ordinary income, and you can carry remaining losses forward for up to 8 years. This flexibility becomes valuable during market downturns. You can turn temporary setbacks into "tax savings accounts" for future use.
Portfolio rebalancing chance
Tax loss harvesting creates a perfect time to rebalance your investment portfolio. You can systematically sell high and buy low by selling underperforming assets. This helps maintain your target allocation percentages without triggering unnecessary tax liabilities. Regular tax management becomes proactive financial planning.
Compliance with Indian and foreign tax laws
As an NRI, you need to follow tax regulations in India and your country of residence. The Double Taxation Avoidance Agreement (DTAA) helps you avoid paying taxes twice. It's available with over 90 countries. US-based NRIs must also meet FATCA requirements and follow the wash-sale rule. The rule won't allow losses when you buy similar securities within 30 days.
Importance of timely ITR filing under Section 139(1)
You must file your Income Tax Return by the deadline under Section 139(1) to keep loss carry-forward benefits. NRIs need to file returns even without taxable income if they have savings accounts over ₹50 lakhs or TDS/TCS over ₹25,000. Late returns lead to penalties, loss of TDS refunds, and you'll lose carried-forward losses.
Documentation required for future audits
Keep complete records of all tax loss harvesting transactions. This means keeping dated receipts, transaction statements, cost basis information, and reinvestment documentation. Organize your records by year and type of income/expense, and create transaction summaries. Good documentation helps with future tax planning and audits. It also makes reviewing your strategy easier years later.
Conclusion
Tax loss harvesting helps NRIs reduce their tax burden while investing in Indian markets. This piece explores how you can lower your tax liability by selling underperforming investments to offset capital gains.
Short-term capital losses give you the most flexibility because they can offset both short-term and long-term gains. Long-term capital losses, on the other hand, can only reduce long-term capital gains. This difference plays a crucial role when you plan your investment sales and purchases.
You can carry forward your losses for up to eight years, which adds substantial value to your tax planning. The losses you book today could benefit you almost a decade later, creating a tax asset you can use when it's most beneficial. All the same, you must file on time under Section 139(1) to keep this benefit.
Real-world examples showed tax savings of up to 71% with proper implementation. Your tax liability of ₹80,000 could drop to just ₹23,000 with careful planning. It also creates natural opportunities to rebalance your portfolio without triggering unnecessary tax consequences.
NRIs need to direct their attention to both Indian tax regulations and those of their residence country. US-based investors should pay special attention to wash sale rule implications when using this strategy. Detailed documentation supports your tax positions and proves valuable during potential audits.
Market volatility becomes a strategic advantage with tax loss harvesting. You can use market declines to create immediate tax relief and future tax assets, rather than seeing them as setbacks. This approach helps maintain investment growth while reducing the tax impact on your returns.
Tax loss harvesting becomes more relevant than ever for NRIs with rising Indian markets and recent increases in capital gains tax rates. Using this strategy carefully could save thousands of rupees each year while maintaining your desired market exposure and investment goals.
Frequently Asked Questions
How can NRIs reduce their tax liability on Indian investments?
NRIs can use tax loss harvesting to offset capital gains and reduce their overall tax burden. This strategy involves selling underperforming investments at a loss to balance out gains from profitable investments, potentially saving thousands of rupees annually.
What are the key differences between short-term and long-term capital losses for NRIs?
Short-term capital losses (STCL) can offset both short-term and long-term capital gains, while long-term capital losses (LTCL) can only offset long-term capital gains. This distinction is crucial for NRIs when planning their investment sales and purchases.
Are there any special considerations for US-based NRIs when implementing tax loss harvesting?
Yes, US-based NRIs must be aware of the wash sale rule, which prohibits claiming a loss when selling a security and repurchasing the same or a substantially identical one within 30 days before or after the sale. This rule applies across all accounts under their name, including IRAs and spousal accounts.
What documentation should NRIs maintain for tax loss harvesting?
NRIs should keep comprehensive records of all transactions involved in tax loss harvesting, including dated receipts, transaction statements, cost basis information, and reinvestment documentation. Organizing records by year and type of income/expense is also recommended to support future tax planning and potential audits.
About the Author
By Prakash
CEO & Founder of InvestMates
Prakash is the CEO & Founder of InvestMates, a digital wealth management platform built for the global Indian community. With leadership experience at Microsoft, HCL, and Accenture across multiple countries, he witnessed firsthand challenges of managing cross-border wealth. Drawing from his expertise in engineering, product management, and business leadership, Prakash founded InvestMates to democratize financial planning and make professional wealth management accessible, affordable, and transparent for every global Indian.
