Long-Term Capital Gain Tax on Mutual Funds in India

In India, investing in mutual funds has grown in popularity as a way to increase wealth. Over the years, a lot of investors have been drawn to mutual funds due to their potential to yield larger returns than conventional savings techniques. But just like any other investment, it’s critical to comprehend all relevant factors and their ramifications. Taxation, particularly the Long Term Capital Gains (LTCG) tax on mutual funds in India, is one such element. So, let’s explore all about LTCG in detail.

What is a long-term capital gain tax on mutual funds?

Selling your stock shares after more than a year of ownership can result in long term capital gain tax on mutual funds. You will be required to pay taxes on your long-term capital gains if they exceed Rs 1 lakh. LTCG on mutual funds tax rates are 10% and do not benefit from indexation. 

Recall that taxes on your mutual fund investments are only due when you sell the scheme or redeem the units. As a result, the mutual fund schemes are exempt from the capital gain tax every year.

Understanding about long-term capital gain tax on the mutual funds

The type of long term capital gain on mutual fund that an individual possesses determines the tax that they are subject to. The following are the long-term capital gains tax consequences for certain mutual funds:

1. Equity funds

These mutual funds make investments in the stock shares of various businesses. In the market, some equities funds save taxes, and those that don’t.

ELSS stands for Equity-Linked Savings Scheme, which is a tax-saving equity fund. You are not allowed to sell or move the money during the three-year lock-in period that comes with them. Consequently, they will be subject to long-term capital gain taxes.

You won’t discover a lock-in period with non-tax saving equity funds. They may, therefore, be subject to both short-term and long-term capital gain taxes, depending on the length of the holding period. When gains exceed Rs 1 lakh, these equity funds are subject to a 10% tax.

2. Equity-oriented hybrid funds

It is possible to buy debt and equity funds through these mutual funds. More than 65% of the investment in that composition should, nevertheless, go into equity shares or shares with an equity orientation. Because of this, these funds are subject to the same long-term capital gain tax as equity funds.

3. Debt Funds

These investment vehicles are used to buy market-based debt products. Mutual funds that invest in debt securities come with LTCG with indexation that are subject to 20% post-indexation taxation. The indexation is done using the Cost Inflation Rate.

By examining the inflation in the acquisition cost, one can compute the Cost Inflation Index. It helps lower the amount of capital gains. The following is the formula for gathering the CII:

The formula is (actual acquisition cost * current year index) / base year index.

4. Debt-oriented Balanced Funds

Over 60% of the money in these funds is reinvested in debt instruments. After indexation, the tax rate on these funds is 20%.

5. Unlisted Equity Funds

Unlisted equities funds have the advantage of indexation and a 20% tax rate on long capital gains. The relevant cessation tax and surcharge are included in the tax rate for unlisted equity funds.

Exemptions from long-term capital gains tax on mutual funds

While long-term capital gains tax is applicable to mutual funds in general, there are certain scenarios where investors can avail exemptions and reduce their tax liability. Let’s take a look at these exemptions:

Section10(38)

This provision states that in the following situations, long-term capital gains on mutual funds are free from taxation:

1. The move took place after October 1, 2004.

2. An asset with a lengthy lifespan was moved.

3. The sale deal is subject to the security transaction tax.

Section 54F

Under this section, mutual fund assets sold through LTCG are eligible for tax benefits. You may be eligible for this exemption if:

• An asset must be purchased either one year prior to or two years following the date of sale.
• Using the capital gain from the LTCG on sale of mutual funds, you built a property. After the purchase date, the construction must be completed within three years.

How to calculate the payable tax on long term capital gains on mutual funds?

In order to calculate the long-term capital gain tax on mutual funds, the following terms must be understood:

● Cost of Acquisition: This is the amount that a seller paid to acquire the capital asset.

● Full Value of Consideration: This is the amount that a seller has received, or has received in the past, in exchange for transferring their capital asset.

Example: 

When you sell your mutual funds after holding them for more than a one year, any of the profit you make is considered a long-term capital gain. This profit is subject to tax, known as the payable tax on long-term capital gains. Let’s break it down:

Let’s say you invested in mutual funds and held onto them for more than a year. When you decide to sell them, the profit you earn from this sale is what we call a long-term capital gain. Now, the government has certain rules about taxing this gain. They don’t tax the entire profit; instead, they apply a tax rate to it.

This LTCG tax rate depends on various factors, including your income level and the type of mutual fund you’re selling. For instance, if your income falls under a certain bracket, you might pay a lower tax rate on your long-term capital gains. However, if you’re in a higher income bracket, you might face a higher tax rate.

It’s also essential to consider the type of mutual fund you’re dealing with. Various types of mutual funds are taxed differently. For instance, equity mutual funds and debt mutual funds have different tax rates for long-term capital gains.

Now, let’s talk about how this payable tax is calculated. It’s typically a percentage of your total long-term capital gains. So, the higher your gains, the higher your payable tax will be. But remember, there are certain exemptions and deductions you might be eligible for, which can reduce the amount of tax you owe.

The bottom line

Long-term capital gains tax is an important aspect to consider while investing in mutual funds. Understanding its implications and making use of available exemptions can significantly reduce your tax liability. It’s always advisable to consult a professional financial advisor or tax expert before making any of the investment decisions. So make sure you do your research and stay informed to make the most out of your mutual fund investments.

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