The Rs 1.25 lakh you forget every April

A friend told me he has never sold a single unit of his index fund in seven years. He said it the way people say they floss every day. A small, quiet virtue.

On almost every count, he is right. Staying invested is the whole game.

On one line, though, it is costing him.

Every financial year, the tax code lets you book Rs 1,25,000 of long term equity gains completely tax free. Section 112A. It resets every April, and it does not carry forward. Use it or lose it.

If you never sell, you use exactly one year of that allowance in your entire investing life, on the day you finally cash out. Every other year's slice just expires, unnoticed.

Here is the part that made him sit up. Put Rs 10 lakh in a fund at 12 percent for twenty years and it grows to about Rs 96 lakh either way. Sell it all at the end and the tax bill is Rs 10,65,162. Book roughly Rs 1,25,000 of gain each year instead, buy the same units straight back, and the bill drops to Rs 7,68,287. Same fund. Same return. About Rs 2,96,875 stays in your pocket, purely because you stopped letting a free allowance expire.

The mechanic is unglamorous. Realise a small long term gain, pay nothing on it because it sits under the exemption, buy the units back at the new higher cost. Two honest catches. The rebought units start a fresh twelve month clock, and small transaction costs apply, so this only makes sense for holdings you were never going to trade anyway.

I like it because it is the rare edge that has nothing to do with predicting anything. The market decides your return. This one line you actually control.

Most people forget it is there every single April, and call the forgetting discipline.

Where the rule lives now

The allowance survived the new law intact. From 1 Apr 2026 the Income-tax Act 2025 replaced the 1961 Act, and the long term rate on listed equity, equity oriented funds and business trust units moved from section 112A to section 198 of the new Act, with the same terms: 12.5 percent on long term gains above Rs 1.25 lakh in a tax year. The Finance Bill 2026 changed no capital gains rate. "Tax year" is the new Act's name for the financial year, so the allowance still resets every 1 April.

The opening's sum, checked

I reran it: Rs 10 lakh at 12 percent for 20 years is Rs 96,46,293. Selling all of it at the end, after the year's Rs 1.25 lakh exemption, leaves Rs 85,21,293 taxed at 12.5 percent: Rs 10,65,162. Harvesting Rs 1.25 lakh of gain in each of the first 19 years lifts the cost base by Rs 23.75 lakh, and the final bill falls to about Rs 7,68,900, within a few hundred rupees of the opening's figure.

Add the 4 percent health and education cess and both bills rise by 4 percent, so the saving grows to about Rs 3.09 lakh. And the cost base matters even if you never sell all of it: every rupee of gain booked tax free is a rupee that can never be taxed later.

One year of the habit

Rs 16,250 a year is small. Over twenty years, on a growing portfolio, it is the Rs 3 lakh in the chart. The habit only pays if it is done every year, which is why it belongs on a calendar.

The yearly routine

1. FebruaryCheck what is already booked

   Add up long term equity gains realised this tax year, including any from rebalancing.

2. MarchBook the gap

   Sell units with long term gains up to the unused part of Rs 1.25 lakh, before 31 March.

3. Next dayBuy back

   Reinvest in the same fund. The new cost is today's price, and a new 12 month clock starts.

4. 1 AprilThe allowance resets

   A fresh Rs 1.25 lakh for the new tax year.

Two cautions from the opening deserve a number. The rebought units are short term for 12 months, so selling them inside that window would be taxed at 20 percent. And the round trip is not free: on shares, STT of 0.1 percent applies on both the sale and the purchase, about Rs 250 on a Rs 1.25 lakh round trip, while fund units carry much smaller charges. Both are small against Rs 16,250, which is why the habit works for long term holdings.

The free Learn module on tax loss harvesting for systematic investors covers gain harvesting and loss harvesting together, with the set off rules. The tax loss harvesting calculator runs both on your numbers. Related: day 364 against day 366.