A client has booked Rs 18 lakh of gains this year and holds three positions sitting on losses of Rs 4, 7 and 11 lakh. Which losses do you harvest, what tax does it save, and what replaces the positions you sell?

Harvest C and B, Rs 11 lakh and Rs 7 lakh, which cancel the Rs 18 lakh gain exactly and save Rs 2.25 lakh at the illustrative 12.5%. C's story has broken, so its money moves to the target mix. B is sold and replaced the same day with a similar index fund from another fund house, so the market exposure never leaves. A is not needed this year.

A shop owner who made money on one line and lost on another pays tax on the net, not on the winner alone. Selling a position that is below cost turns a paper loss into a realised lossA loss that exists for tax because the position has been sold, rather than one that only shows on a statement., which can be set against realised gains, so the tax is paid on the net. Gitanjali's Rs 18 lakh gain would cost Rs 2.25 lakh at 12.5%. Harvest Rs 18 lakh of losses and the net is zero.

Start with the position you would sell anyway. C lost its main contract, so the reason for owning it has gone; a loss on a position you no longer want is the cleanest harvest, because the tax saving and the investment decision point the same way. C gives Rs 11 lakh. B, the index fund, gives the remaining Rs 7 lakh, and it is easy to replace. That covers Rs 18 lakh exactly. A is not needed; harvesting it too would only create a Rs 4 lakh carry-forward, and a sector fund bought eight months ago may still carry an exit load.

B was sold for tax, not because its role in the portfolio ended. Staying in cash while waiting would turn a tax decision into a market-timing bet. Buy a fund that tracks the same or a very similar index from a different fund house on the same day, so the exposure is unbroken. Some countries disallow a loss if the same security is bought back within a set period; confirm the current Indian treatment with a tax adviser before rebuying the identical fund.

Mostly it is a deferral, and saying so is what separates a good answer. The replacement for B is bought at today's lower price, so when it is eventually sold the gain is Rs 7 lakh larger. Harvesting is an interest-free loan from the tax authority: the Rs 2.25 lakh stays invested now and part of it is repaid later. Deferred for ten years at an illustrative 10% return, it is worth about Rs 1.38 lakh today, less trading costs and any exit loads.