Long Term Capital Gain Tax on Mutual Funds
- 4m0•
- 02 Oct 2023
The difference between the cost of acquisition and the selling price of a capital asset is the capital gain. As more investors choose mutual funds as their preferred investment vehicle, the taxation of long-term profits on mutual funds is attracting attention. Let's learn more about the long-term capital gain tax on mutual funds. But it's essential first to comprehend long-term financial gains to understand the taxation on mutual funds.
Understanding Long Term Capital Gains Tax on Mutual Funds
The long term capital gain tax for mutual funds mainly depends on the kind of assets it focuses on. Here’s how long term capital gain tax applies to different mutual fund types.
Equity-Based Mutual Funds' LTCG
Gains on the sale of equity-based mutual funds held for more than a year are subject to a 10% tax on returns. Long-term capital gains from equities mutual funds and tax-saver funds, however, are not subject to taxation if they do not exceed Rs. 1 lakh in a fiscal year. Mutual equity funds do not benefit from indexation.
Debt Funds' LTCG
LTCG tax on debt funds held for more than 36 months is taxable at 20% after indexation. Debt fund owners have the option to use indexation to adjust the acquisition cost for inflation throughout the holding period and lower the taxable LTCG.
Tax on Balanced or Hybrid Funds
Hybrid or balanced funds that have a minimum 65% equity exposure are subject to taxes in accordance with the equity fund regulations. If the equity position is less than 65%, the tax rules for debt funds get applied.
LTCG Tax on SIPs
To determine whether they are long or short-term profits, capital gains for Systematic Investment Plans (SIP) are calculated for units allocated against each payment based on the first purchase date. When equity mutual fund units are sold after being held for more than a year, the sale is regarded as a long-term capital gain.
Balanced Funds
10% (if equity exposure equal or more than 65%), 20% (if equity exposure more than 65%)
No
SIPs
calculated based on the holding period of each unit. LTCG is applicable for holdings exceeding 1 year
No
| Type of Mutual Fund | LTCG Tax Rate | Indexation Benefit |
|---|---|---|
Equity Funds | 10% | No |
Debt Funds | 20% | Yes |
Balanced Funds | 10% (if equity exposure equal or more than 65%), 20% (if equity exposure more than 65%) | No |
SIPs | calculated based on the holding period of each unit. LTCG is applicable for holdings exceeding 1 year | No |
Voting rights | Shareholders enjoy voting rights on company matters | Don’t typically have voting rights |
Holding duration | Held for the long term | Held for short or medium terms |
Profit Timing | Profits realized when the asset's price exceeds the strike price. | Profits realized when the asset's price falls below the strike price. |
How to Calculate Long Term Capital Gain?
Understanding the following concepts is crucial to learning how to calculate long term capital gain tax on mutual funds.
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Asset Sale Value: This is how much cash you'll get when you sell your investments.
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Cost of Acquisition: This is the cost you paid when you first purchased the funds.
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Cost of Acquisition /Sale: This is the amount you paid to make improvements to the funds or any expenses incurred while selling them, like securities transaction tax (STT).
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Cost of Acquisition: The adjusted cost of acquisition that accounts for the effects of inflation is known as the "Indexed Cost of Acquisition" (ICoA). The government-provided Cost of Inflation Index (CII) is the factor you use to compute it.
The formulas are as follows;
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ICoA = Cost of Acquisition × (CII of Sale year / CII of Purchase year).
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Long Term Capital Gain = The total value of consideration received - incurred expenditure - the indexed cost of acquisition
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Indexed Cost of Acquisition: Original Purchase Price *(Cost Inflation Index (CII) of Sale Year/ CII of Year of Purchase)
An Illustration of Long Term Capital Gains Tax on Mutual Funds
For instance, you purchased shares in January 2021 for Rs 65,000 and sold them in February 2023 for Rs 2.75 lakh. The earnings will be regarded as a long-term capital gain because the tenure is longer than 12 months. You must take the following factors into account when calculating the long-term capital gains on mutual funds:
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The total consideration is Rs. 3 lakh.
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The indexed cost of acquisition will be Rs 65,000 * (140/100) = Rs 91,000 if the cost of inflation index for the specified year is 140.
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The entire taxable gain is Rs. 2,75,000 - Rs. 91,000 = Rs.1,84,000.
For mutual funds with a value over Rs 1 lakh, the long-term capital gains tax rate is 10%. As a result, Rs 18,400 in taxes are due on the gains from the mutual funds you invested.
Changes to LTCG on Equity Funds in 2018
Debt and equity are discussed separately when discussing long-term capital gains tax on mutual funds. However, there are two-time frames for the LTCG computation for equity funds. One before 2018 and one after it. This is due to the fact that the long-term capital gains tax on equity mutual funds was only made taxable for the first time in the investor's hands in the Union Budget 2018.
The Indian government stated in 2018 that all investments in stocks and equity mutual funds will be subject to a flat 10% tax on long-term capital gains. Up to March 2018, there was no long-term capital gains tax on stocks and equity funds. Therefore, this represented a significant change. The investor's possession of them was completely tax-free.
However, there is a benefit of a basic exemption of Rs. 1 lakh in place of the indexation benefit, and any capital gains beyond Rs. 1 lakh will only be subject to a 10% tax rate. The yearly exemption cap is this amount. This allows investors the flexibility to schedule their withdrawals so they can qualify for the exemption throughout the maximum number of years.
Long Term Capital Gains Tax Calculator
A useful tool that displays your long-term capital gains and tax liability for equities-oriented mutual funds and listed equity shares is the long-term capital gains calculator or LTCG Calculator. You enter the holding period, the purchase price, and the sale price of the equity-oriented fund in the formula box of the LTCG Calculator. Depending on the holding period, the calculator will show the taxable long-term capital gain or short-term capital gain. You can find the tax calculator on the online portals of well-known financial houses like Kotak Securities. Using it, you can spot the best mutual funds to invest in, offering considerable tax benefits.
Conclusion
There are several mutual fund advantages that you can discover. However, it is true that investors now have to pay long term capital gain tax on mutual funds. Yet, they can be a tax-efficient financial instrument if you hold them for a long time. The tax rate for long-term capital gains on mutual funds is significantly lower than the rate for short-term capital gains. As a result, investing in mutual funds with a long-term plan can provide you with a number of tax advantages.
FAQs on Long Term Capital Gain Tax on Mutual Funds
When you redeem the unit or sell the plan, you have to pay any applicable taxes on the mutual fund investment. The payment of tax is not necessarily yearly. But you must pay it if you received dividends in accordance with the applicable income tax slab rate.
According to Section 54EA, there may be a capital gain exemption if the long-term capital asset was transferred before 1 April 2020 and invested within 6 months of the transfer date in a specific bond share.
For both equity and debt mutual funds, there is currently no option to lower the tax on capital gains on short-term returns. If a person sells their equity investment before a year has passed, they will be subject to a 15% capital gains tax on short-term returns.
The tax on capital gains will be lower if the investment is smaller. The practice of "tax harvesting" lowers taxes on long-term gains by selling a portion of equity mutual fund units each year and reinvesting the funds into the same fund.
Yes, you must include information on mutual fund capital gains in your income tax return (ITR). Depending on your overall income and additional sources of income, you should utilise a particular ITR form. Depending on your income level, you will often need to file an ITR-2 or ITR-3 if you have capital gains from mutual funds.
