Capital Gains and Capital Losses: A Tax Strategy Guide

Abraham Cherian
Dec 12, 2025
6 min read

As you transition into retirement after distinguished military service, understanding how to manage investment and property income becomes crucial for preserving your wealth. While capital gains taxation receives considerable attention, the complete picture involves both gains and losses. This comprehensive guide explains how to strategically manage both to minimize your tax liability while maximizing retirement wealth.

Understanding Capital Gains and Losses

Capital gains are profits earned when you sell an asset for more than its purchase price. Capital losses occur when you sell for less. In India's tax system, these aren't treated equally—capital losses can only offset capital gains, not your pension income. This fundamental rule shapes your entire retirement tax strategy.

The holding period determines your tax treatment. Assets held for 12 months or more (equity) or 24 months or more (property) qualify for long-term capital gains (LTCG) treatment, taxed at preferential rates. Assets held shorter periods incur short-term capital gains (STCG) taxes at higher rates.

Current Tax Rates and the 12.5% Rule

Effective July 23, 2024, India implemented significant changes. Long-term capital gains on listed equity shares and equity mutual funds are now taxed at 12.5% on gains exceeding ₹1.25 lakh, without the indexation benefit (inflation adjustment) that previously applied. For real estate purchased after July 23, 2024, the same 12.5% rate applies without indexation. However, properties purchased before that date offer a choice: pay 20% with indexation benefits or 12.5% without indexation.

This change fundamentally affects retirees with substantial investment portfolios. The removal of indexation benefits means higher effective tax rates, making strategic loss management even more critical.

Leveraging Capital Losses: The Set-Off Rules

Understanding loss set-off rules is essential to reducing tax liability. Short-term capital losses (STCL) provide maximum flexibility—they can be set off against both short-term and long-term capital gains. Long-term capital losses (LTCL) traditionally could only offset long-term gains. However, the new Income Tax Bill 2025 introduces a significant benefit: long-term capital losses incurred before March 31, 2026, can be set off against any capital gains, including short-term gains, from FY 2026-27 onwards.

A critical advantage: India has no wash sale rule. You can sell investments at a loss and immediately reinvest in similar assets without forfeiting the tax benefit—a flexibility U.S. investors don't have. This enables powerful tax loss harvesting strategies.

Carried-forward losses can be utilized for up to eight years. If you don't use losses immediately, they remain available across multiple financial years, providing flexibility for multi-year tax planning.

Capital Gains Exemptions: Maximizing Tax-Free Wealth

Section 54 (Residential Property Exemption) offers complete exemption from long-term capital gains tax when you sell a residential property and reinvest proceeds in another residential house within prescribed timeframes. The exemption applies to gains up to ₹10 crore, with a special benefit: if gains are ₹2 crore or less, you can invest in two residential properties and claim exemption on both (a one-time lifetime benefit).

Section 54F provides exemption when you sell non-residential long-term assets (land, commercial property, gold) and invest capital gains into a residential house, with the same ₹10 crore exemption limit.

ELSS Mutual Funds offer a dual tax advantage: your investment of up to ₹1.5 lakh qualifies for income tax deduction under Section 80C, and after the three-year lock-in period, long-term capital gains up to ₹1.25 lakh are completely tax-free, with remaining gains taxed at 12.5%.

Example 1: Tax Loss Harvesting with Mutual Funds

Consider Retired Colonel Sharma, aged 62, with the following portfolio:

Fund A (Large-Cap): Purchased ₹10 lakhs (2020), worth ₹14 lakhs. Gain: ₹4 lakhs
Fund B (Mid-Cap): Purchased ₹6 lakhs (2023), worth ₹4.8 lakhs. Loss: ₹1.2 lakhs
Fund C (Balanced): Purchased ₹8 lakhs (June 2024), worth ₹7.4 lakhs. Loss: ₹0.6 lakhs

Without loss harvesting, Colonel Sharma faces tax of ₹50,000 (₹4 lakhs × 12.5%).

With strategic loss harvesting: He sells Fund B (realizing ₹1.2 lakh loss) and immediately reinvests in a similar fund—permissible since India has no wash sale rule. He also sells Fund C (₹0.6 lakh loss).

Tax calculation after harvesting:

LTCG: ₹4 lakhs
Less: LTCL: ₹1.2 lakhs
Less: STCL (can offset LTCG): ₹0.6 lakhs
Net taxable gain: ₹2.2 lakhs
Tax at 12.5%: ₹27,500

Tax savings: ₹22,500, while simultaneously removing underperforming funds and maintaining market exposure through reinvestment.

Example 2: Strategic Multi-Year Planning with Section 54

Retired Air Commodore Patel holds substantial real estate with mixed performance. He plans to sell two properties and consolidate:

Property A (Residential, Delhi): Purchased ₹1.5 crores (2005), worth ₹4.5 crores. Gain: ₹3 crores
Property B (Commercial Plot): Purchased ₹80 lakhs (2010), worth ₹65 lakhs. Loss: ₹15 lakhs
TCS Shares: Purchased ₹3 lakhs, worth ₹5 lakhs. Gain: ₹2 lakhs
SBI Shares: Purchased ₹2.5 lakhs, worth ₹1.8 lakhs. Loss: ₹0.7 lakhs

Scenario 1—All sales in FY 2024-25 (Without Section 54):

Net capital gain: (₹3 crores + ₹2 lakhs) – (₹15 lakhs + ₹0.7 lakhs) = ₹2.865 crores
Tax at 12.5%: ₹35,812,500

Scenario 2—Optimized strategy with Section 54:

FY 2024-25:

Sell Property A (residential): Realize ₹3 crore gain
Sell Property B (commercial): Realize ₹15 lakh loss
Sell SBI shares: Realize ₹0.7 lakh loss
Net taxable gain before exemption: ₹2.842 crores
Claim Section 54 exemption: Reinvest ₹3 crores in new residential property within one year before or two years after sale—exempts entire ₹3 crore gain
Tax liability: ₹0

FY 2025-26:

Sell TCS shares: ₹2 lakh gain
Tax at 12.5%: ₹25,000

Total tax across two years: ₹25,000 (versus ₹35.8 lakh in year one)

Tax savings: ₹35,787,500 through coordinated loss management and exemption strategy.

Tax Loss Harvesting: Practical Implementation

Tax loss harvesting involves deliberately selling underperforming investments to realize losses that offset gains elsewhere. For retirees, this simultaneously reduces tax liability and improves portfolio quality.

Example: You hold Mutual Fund X (₹10 lakhs purchased, now ₹8.5 lakhs—STCL ₹1.5 lakhs, held 8 months) and Mutual Fund Y (₹5 lakhs purchased, now ₹6.2 lakhs—LTCG ₹1.2 lakhs, held 14 months).

Without harvesting: Tax = ₹15,000With harvesting: Sell Fund X (realize loss), reinvest in different equity fund, keep Fund Y. Net gain = ₹0; tax = ₹0

You've eliminated tax liability, removed an underperformer, and maintained market exposure.

Critical Implementation Rules

ITR Filing Deadline is Non-Negotiable: Losses must be reported in your Income Tax Return before the statutory due date (typically July 31) to preserve carry-forward rights. Missing this deadline forfeits the loss entirely.

Maintain Meticulous Records: Keep purchase dates, costs, sale dates, selling prices, and supporting documents. Digital records with confirmations are particularly valuable if questioned by income tax authorities.

Avoid Bonus Stripping: While India has no wash sale rule, there is a related concept. Selling shares at a loss and repurchasing identical shares within three months may result in loss disallowance. Solution: purchase similar but different stocks (e.g., sell SBI, buy ICICI; sell TCS, buy Infosys).

Coordinate Multi-Year Planning: With eight-year carry-forward periods, plan asset sales strategically across multiple years. If you have substantial property sales anticipated, stagger them with loss-making positions to minimize any single year's tax impact.

Aligning with Retirement Income Planning

For armed forces officers, coordinate loss management with overall retirement strategy:

Use Systematic Withdrawal Plans (SWP) from mutual funds to generate monthly retirement income, strategically selecting which fund units to redeem—prioritize loss-making positions
Time property sales alongside securities sales to maximize loss set-off
Realize capital gains in lower-income years when you're reducing investment withdrawals
Leverage Section 54 benefits when downsizing real estate holdings

Key Exemptions Summary

Exemption	Applies To	Maximum Benefit	Key Requirement
Section 54	Residential property sales	₹10 crore	Reinvest in residential property within prescribed timeframe
Section 54F	Non-residential asset sales	₹10 crore	Invest proceeds in residential property
ELSS Funds	Equity mutual fund investments	₹1.25 lakh gains tax-free	Hold for 3 years; invest through Section 80C
Senior Citizens	All income sources	₹3 lakh exemption limit	Age 60+; ₹5 lakh for age 80+

Essential Takeaways

Capital gains and capital losses represent two sides of the same strategic coin. While capital gains are inevitable when your investments perform well, capital losses—when managed strategically—provide powerful offsets. The combination of loss harvesting, carried-forward losses, and statutory exemptions creates substantial tax-planning opportunities for retiring armed forces officers.

The eight-year carry-forward window provides flexibility to orchestrate your asset sales across multiple years, coordinating property sales with loss realization. The absence of a wash sale rule means you can harvest losses and maintain desired portfolio allocations through immediate reinvestment. Major exemptions like Section 54 can eliminate substantial tax liabilities entirely when real estate is involved.

As you transition to retirement, treat capital gains and loss management with the same strategic rigor you applied to your military career. The difference between reactive selling (selling when you need cash) and proactive strategic selling (selling to optimize taxes) can literally save hundreds of thousands or millions of rupees over your retirement years—wealth preserved through knowledge and careful planning.

Disclaimer: This content is for informational purposes only and does not constitute financial or tax advice. Capital gains taxation and loss management involve complex calculations with individual circumstances varying significantly. Tax laws are subject to change, and these explanations reflect regulations as of December 2025. Consult with a qualified chartered accountant or tax professional registered with ICAI before implementing any tax strategy or making significant investment decisions.