Financial Awareness Level
Long Term Capital Gain on Mutual Funds
Introduction
Long-term capital gains (LTCG) on mutual funds refer to the profits earned from the sale of mutual fund units held for a longer duration. The tax treatment varies depending on whether the mutual fund is equity-oriented or debt-oriented.
What is Long Term Capital Gain on Mutual Funds?
LTCG arises when an investor sells mutual fund units after holding them for a specific period:
- Equity-oriented mutual funds: Held for more than one year.
- Debt-oriented mutual funds: Held for more than three years.
Long Term Capital Gains Tax on Mutual Funds in India
- Equity Mutual Funds: LTCG exceeding ₹1.25 lakh is taxed at 12.5 without indexation benefits.
- Debt Mutual Funds: LTCG is taxed at 20% with indexation benefits, helping adjust the purchase price for inflation.
(You are recommended to seek advice from your tax advisor for latest tax legislations)
How is Long Term Capital Gains Tax Calculated?
- For Equity Mutual Funds: LTCG = Sale Price - Purchase Price - Expenses Related to Sale
- For Debt Mutual Funds: LTCG = Sale Price - Indexed Purchase Price - Expenses Related to Sale (Indexed Purchase Price is adjusted using the Cost Inflation Index (CII) issued by the Income Tax Department.)
Exemptions and Deductions
- Grandfathering Clause: For equity mutual fund investments made before January 31, 2018, only gains above the highest market price on that date are taxable.
- Section 54F: Exemption on LTCG if reinvested in residential property, subject to conditions.
- Section 54EC: Exemption available if gains are invested in specific government bonds.
Who is Liable to Pay Long Term Capital Gains Tax?
- Investors earning profits from selling mutual fund units beyond the specified holding period.
- Individuals, Hindu Undivided Families (HUFs), and companies with mutual fund investments.
Conclusion
Understanding long-term capital gains tax on mutual funds is crucial for effective financial planning. Investors should consider applicable tax rates, exemptions, and investment strategies to optimize their tax liability and maximize returns.
FAQ Section
What is Long Term Capital Gain (LTCG) on Mutual Funds?
LTCG on mutual funds refers to the profit earned from selling mutual fund units after holding them for a longer duration.
How long do I need to hold mutual funds for LTCG tax to apply?
- Equity-oriented mutual funds: More than one year.
- Debt-oriented mutual funds: More than three years.
What is the LTCG tax rate on mutual funds in India?
- Equity Mutual Funds: LTCG exceeding ₹1.25 lakh is taxed at 12.50% without indexation.
- Debt Mutual Funds: LTCG is taxed at 20% with indexation benefits.
How is LTCG on Mutual Funds calculated?
- For Equity Mutual Funds: LTCG = Sale Price - Purchase Price - Expenses Related to Sale.
- For Debt Mutual Funds: LTCG = Sale Price - Indexed Purchase Price - Expenses Related to Sale.
What is indexation, and how does it help reduce LTCG tax on debt funds?
Indexation adjusts the purchase price for inflation using the Cost Inflation Index (CII), reducing taxable gains and lowering the tax burden for investors in debt mutual funds.
Are there any exemptions on LTCG tax for mutual funds?
Yes, certain exemptions are available:
- Grandfathering Clause: For equity mutual funds purchased before January 31, 2018, only gains above the highest market price on that date are taxable.
- Section 54F: Exemption if LTCG is reinvested in a residential property.
- Section 54EC: Exemption if LTCG is invested in specified government bonds.
Who needs to pay LTCG tax on mutual funds?
Individuals, Hindu Undivided Families (HUFs), and companies earning profits from mutual fund sales.
Can LTCG tax be avoided or minimized?
- Utilize the ₹1.25 lakh exemption limit for equity mutual funds.
- Invest in tax-efficient funds like ELSS (Equity Linked Savings Schemes) for deductions under Section 80C in old tax regime.
- Use indexation benefits for debt mutual funds.
How do I report LTCG tax on mutual funds in my Income Tax Return (ITR)?
LTCG must be declared under the Capital Gains section in the ITR. Different ITR forms apply based on income sources and taxpayer category.
Is TDS deducted on LTCG from mutual funds?
No, Tax Deducted at Source (TDS) is not applicable on LTCG from mutual funds for resident Indian investors. However, NRIs may have TDS deducted as per tax laws.
(You are recommended to seek advice from your tax advisor for latest tax legislations)
Did you find this article Interesting?
1
2
3
4
5
Recommended For You
Beginner
Key Terms & Concepts
5 min read
Advanced
Key to Investing Wisely over a Long-term
5 min read
Advanced
How Mutual Funds Can Help Achieve Long-Term Life Objectives
5 min read
An Investor Education And Awareness Initiative
Visit https://www.hdfcfund.com/information/key-know-how to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website (www.sebi.gov.in/intermediaries.html). For any queries, complaints & grievance redressal, investors may reach out to the AMCs and / or Investor Relations Officers. Additionally, investors may also lodge complaints directly with the AMCs. If they are not satisfied with the resolutions given by AMCs, they may raise complaint through the SCORES portal on https://scores.sebi.gov.in/scores-home/. SCORES portal facilitates investors to lodge complaint online with SEBI and subsequently view its status. In case the investor is not satisfied with the resolution of the complaints raised directly with the AMCs or through the SCORES portal, they may file any complaint on the Smart ODR on https://smartodr.in/login.
The information is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY
