How do you use the ₹1.25 lakh tax exemption on mutual fund gains every year?
Last reviewed: 22 Oct 2026 · Noema Research · 7 min read
Long-term gains on equity funds are exempt from tax up to ₹1.25 lakh each financial year, but an unused limit doesn't carry forward. Tax harvesting books gains up to that limit before 31 March and reinvests the money, so your cost rises and future tax falls. Sell only units held more than 12 months, oldest first. In our example, selling 2,666 units books ₹1,24,975 of gains within the exemption, about ₹15,600 less tax later at 12.5%, before cess.
Create an account to map this answer against your salary allocation.
Plan your tax harvest
Your statement lists each purchase. Enter them, and we'll find how many units to sell.
Example values
| Purchase date | Units | Purchase NAV (₹) |
|---|---|---|
Estimate
Sell 2,666 units (about ₹2,66,600)
Gains booked: ₹1,24,975, inside your ₹1,25,000 limit.
Tax saved later: about ₹15,622 at 12.5%, before cess.
Reinvest the same day; the new units start a fresh 12 months.
| Lot | Units sold | Gain |
|---|---|---|
| 15 Apr 2023 | 2,000 | ₹1,00,000 |
| 15 Apr 2024 | 666 | ₹24,975 |
| 15 Apr 2026 | 0 | ₹0 |
Estimate, not a prediction · View as table
Why an unused limit is lost
Each financial year gets its own ₹1.25 lakh limit. If you sell nothing, the limit expires and all your gains wait to be taxed later.
How tax harvesting works
- Check gains already booked this year.
- Find units held more than 12 months.
- Sell oldest first, up to the limit.
- Reinvest the same amount in the same or a similar fund.
- Keep the statement for your return.
Why oldest units go first
With SIPs, every month is a separate purchase. Sales use the oldest units first, so you can't pick only the units with the smallest gain.
| Date | Units | Purchase NAV | Gain per unit | Sold |
|---|---|---|---|---|
| 15 Apr 2023 | 2,000 | ₹50 | ₹50 | 2,000 |
| 15 Apr 2024 | 1,000 | ₹62.50 | ₹37.50 | 666 |
| 15 Apr 2026 | 800 | ₹75 | ₹25 | 0 |
A worked example
At a NAV of ₹100, the 2023 lot gains ₹50 a unit: 2,000 units book ₹1,00,000. The 2024 lot gains ₹37.50 a unit: 666 more units book ₹24,975. The total is ₹1,24,975. The April 2026 lot isn't 12 months old, so it stays.
Timing and limits
Sell by the last market day of March, leaving time for the sale to settle. Check exit loads first; ELSS units can't be sold during their 3-year lock-in. Harvest each year, not just once.
Common mistakes
- Forgetting gains from shares, which share the same limit.
- Selling units under 12 months old, taxed at 20%.
- Leaving the money uninvested.
- Paying an exit load larger than the tax saved.
Switching regular plans to direct?
A switch is a sale too, so the same limit can cover part of it each year. See whether switching from regular to direct pays.
FAQ
What is tax harvesting in mutual funds?+
Selling equity fund units with long-term gains up to ₹1.25 lakh in a financial year and reinvesting, so those gains are never taxed.
Is the ₹1.25 lakh limit per fund?+
No. It is per person, across all listed shares and equity funds sold in the year.
Can I buy back the same fund?+
Yes. The new units get a higher cost and a fresh 12-month holding period.
When should I harvest?+
Any time before the last market day of March. Many investors do it once a year in February or March.
Related answers
- Old vs New Tax Regime: When Does the Old One Still Win?
For Tax Year 2026–27, the new regime costs less for most salaries. At ₹18 lakh, the old one wins only once your deductions pass ₹6,41,667. Find your break-even.
- ELSS vs PPF vs NPS: Which Should You Choose?
There's no single winner. ELSS, PPF and NPS do different jobs, so choose by goal, lock-in and tax regime, and combine them where it helps.
- Should you switch your regular mutual funds to direct, and when does it pay off?
A switch is a sale, so it can mean tax now. See the year the lower costs of a direct plan win back that tax, and how to switch in stages.
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