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LTCG on Mutual Funds

Mutual funds are considered capital assets for the purpose of taxation under the Income Tax Act, 1961. Due to this recognition, the sale of any units of mutual funds is subject to capital gains. So now that we understand that mutual funds are a capital asset, the taxability depends on the period of holding and type of scheme. The following table provides the tax period of holding and rate of long term capital gain on mutual funds.

Type of Mutual FundPeriod of HoldingTax Rate on LTCG
Units of an equity-oriented fundMore than 12 months 10% over and above Rs. 1,00,000 without indexation
Units of a debt fundMore than 36 months20% with indexation
Balanced Funds (equity-oriented)More than 12 months 10% over and above Rs. 1,00,000 without indexation
Balanced Funds (debt-oriented)More than 36 months20% with indexation
Hybrid Mutual (equity exposure of more than 65% of total investment)More than 12 months 10% over and above Rs. 1,00,000 without indexation
Hybrid Mutual (equity exposure less than 65% of total investment)More than 36 months20% with indexation

How to Calculate Long Term Capital Gain on Mutual Funds?

To calculate the long term capital gain tax on mutual funds you need to use the method shown in the following table:

ParticularsAmount
Full value of salexx
Less: Expenditure incurred in connection with a transferxx
Less: Indexed cost of acquisition;
cost of acquisition * (CII of the year of transfer / CII of the year of acquisition)
xx
Less: Indexed cost of improvement;
Capital expenditure on improvements after 01-04-2001 * (CII of the year of transfer / CII of the year in which improvement was made)
xx
Long-term capital gain on mutual fundxx
Less: Exemptionsxx
LTCG tax payablexx

How to Calculate LTCG on Equity Oriented Mutual Funds?

Any LTCG, exceeding Rs 1,00,000, arising on the sale of equity-oriented mutual funds, will be liable to a tax of 10% provided securities transaction tax (STT) has been paid on the purchase and sale of the equity-oriented mutual fund.

Any LTCG, below Rs 1,00,000 arising on sale is tax-free.

Securities transaction tax applies to the purchase or sale of securities, including units of an equity-oriented mutual fund.

Computation of long term capital gains in case of equity-oriented mutual funds

Suppose Aditi had invested in an equity-oriented mutual fund in April 2016 and the investment amount was Rs. 1,00,000 at a NAV of Rs. 10 and decided to redeem the same in July 2022 say at a NAV of Rs. 30

In the above case, the gains arising from the sale will be considered long term capital gain and the benefit of indexation will not be allowed while computing the capital gain.

Here’s how the calculation would be made in such a case:

ParticularsAmount(INR)
The full value of the consideration received (10,000 units @ Rs 30)3,00,000
Sale consideration(A)3,00,000
Less: Cost of acquisition (B)1,00,000
Long Term Capital Gain on Mutual Funds (C=A-B)2,00,000
Period of holdingMore than 36 months
Rate of tax10%
Tax payable 2,00,000*10% = 20,000

How to Calculate LTCG on Debt Oriented Mutual Funds?

Any long-term capital gain, arising from the transfer of a debt fund, will be liable to tax of 20% with indexation benefit.

Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it. It increases the purchase price of the asset which will eventually lead to lower profits hence bringing down your taxable income. 

Suppose Amit had invested in a debt fund in April 2016 and the investment amount was Rs. 1,00,000 at a NAV of Rs. 10 and decided to redeem the same in July 2022 say at a NAV of Rs. 20

In the above case, the gains arising from the sale will be considered long term capital gain and the benefit of indexation will be allowed while computing the capital gain.

Here’s how the calculation would be made in such a case:

ParticularsAmount
The full value of the consideration received (10,000 units @ Rs 20)2,00,000
Sale consideration(A)2,00,000
Less: Indexed cost of acquisition (B)1,09,470
Long Term Capital Gain on Mutual Funds (C=A-B)Rs 90,530
Period of holdingMore than 36 months
Rate of tax20%
Tax payable Rs 90,530 * 20% = Rs 18,107

LTCG on Systematic Investment Plans (SIP)

SIP’s are taxed in a different way as compared to the above-mentioned method. If you think of it, SIPs are nothing but just a different way of investing in mutual funds. It allows a person to invest small or large depending on their financial capability and gives them the flexibility to choose the tenure of the investments.

When it comes to the taxability of SIP, each investment made (say on a monthly basis) will be treated as a new investment and the period of holding will be counted from the date of the investment for computation of capital gain.

So, in a case where you have made a SIP of say Rs. 5,000 per month, only the gains which have been earned on the investments made a year ago will be tax-free.

Frequently Asked Questions

Is long term capital gain on mutual funds exempt?

Yes, long term capital gain on equity mutual funds is exempt up to Rs 1 lakh. Any LTCG above Rs 1 lakh on equity mutual funds is taxable at a rate of 10% without the benefit of indexation. However, a similar tax exemption is not eligible for debt mutual funds. Hence debt funds are taxable at a flat rate of 20% with the benefit of indexation.

How do I avoid capital gains tax on mutual funds?

If you have invested in equity funds then you can avoid capital gains tax by staying invested for more than 12 months. Then, LTCG will be applicable. LTCG on equity funds is exempt up to Rs 1 lakh. In the case of debt funds, if you hold them for less than 36 months then STCG is applicable. However, if you hold the units for more than 36 months then LTCG is applicable. The LTCG on debt funds is taxable at a flat rate of 20% along with the benefit of indexation. Hence, to avoid taxes you must calculate the tax under STCG and LTCG with indexation benefit. This way you can plan your taxes and avoid paying a higher tax.

Which mutual fund is tax-free?

An investment in ELSS equity linked saving scheme allows an investor to claim a tax deduction of up to Rs 1.5 lakhs under section 80C. However, the capital gain is taxable on the sale of these units. Since a lock-in period of 36 months is applicable on ELSS, it will always be subject to long term capital gain. Furthermore, LTCG of up to Rs 1 lakh is exempt.

Is long term capital gain on mutual funds taxable?

Yes, long term capital gain on mutual funds is taxable under the Income Tax Act, 1961 in India. The only exemption applicable on capital gains on mutual funds is LTCG on equity funds. Long term capital gain on equity funds is tax exempt up to Rs 1 lakh.

Where can I show LTCG on mutual funds in ITR?

You need to mention the LTCG on mutual funds under the head income from capital gains. You need to mention the sale value, cost of acquisition or purchase value, and expenses incurred.

Is capital gain exempt up to 1 lakh?

Yes, long term capital gain on equity oriented mutual funds is exempt up to Rs 1 lakh.

Do mutual funds count as capital gains?

Yes, mutual funds are considered capital assets. Hence, capital gains and capital gain tax is applicable. The tax rate depends on the period of holding, and the type of mutual fund.