What Are Open Ended Mutual Funds?
- 5 min read
Planning to redeem your mutual fund investments after a long time? But have you thought about how much tax you have to pay on the gains? A lot of investors get shocked when they see that their long-term mutual fund profits are not completely tax-free.
The new 12.5% long-term capital gain (LTCG) tax on holding units held for more than a year impacts the long-term investors.
Read this blog to get more details on LTCG on mutual funds, calculation of LTCG tax, and how you can save LTCG.
What Does Long-term Capital Gain Mean?
Long-term capital gains or LTCG are capital gains or earnings that result from the transfer of long-term capital assets. A long-term capital asset is an asset that you have kept for longer than 24 months. The holding term is 12 months for business trust units, equity shares, and equity funds.
Sections 112 and 112A are the two provisions that make up the LTCG tax on mutual funds. Section 112A covers the following assets:
- Ownership stake in a publicly traded corporation
- Listed securities
- Unlisted securities
- Immovable property
- Equity-oriented fund unit
- Business Trust Unit
All other LTCG situations not addressed by Section 112A are controlled by Section 112.
How is Tax Applicable on Asset Returns?
Since July 23, 2024, the following tax rates apply to LTCG as per the Union Budget 2024:
| Assets Sold | LTCG Tax Rate |
| Listed equity shares, units of Business Trust, and equity-oriented mutual funds | 12.5% Without Indexation |
| Land and building | 12.5% without indexation |
| Other capital assets | 12.5% without indexation |
Calculation of LTCG on Mutual Fund
Follow the steps below to calculate the tax for LTCG on mutual funds redemption:
- Calculate the entire amount received through the capital asset transfer. It covers the money received or, in some specific situations, fair market value.
- Now, calculate the net value of the consideration. You can calculate it by subtracting the commission, brokerage, and other costs.
- You must determine the asset’s purchase price. Additionally, for assets that benefit from indexation, you have to adjust the cost of acquisition using the Cost Inflation Index (CII). The government releases it annually. The indexation advantage is no longer available for transfers after July 23, 2024.The following formula is used to determine the indexed cost of acquisition:Indexed cost of acquisition = Cost of acquisition x (CII of the year of transfer / CII of the year of acquisition)
- Certain types of long-term capital gains may be eligible for exemptions under section 54/54B/54D/54EC/54F, if certain requirements are met.
- The LTCG amount subject to tax is 12.5% tax rate. The tax rate is 20% if the indexation advantage is used. An exemption of INR 1.25 lakh may be used if listed equity shares and equity-oriented mutual funds are sold.
Example of LTCG Tax Application on Mutual Fund Returns
Let us understand how tax is applied for LTCG on mutual funds in 2 different scenarios:
Scenario 1
Your total investment value in equity funds is INR 1,00,000, which you have held for more than 1 year. You sold them for INR 2,00,000. Your total gain is INR 1,00,000. No mutual fund LTCG tax will be charged because the gain is less than INR 1.25 lakh.
Scenario 2
Your total investment value in equity funds is INR 2,00,000, which you have held for more than 1 year. You sold them for INR 4,00,000. Your total gain is INR 2,00,000. Since it exceeds INR 1.25 lakh, LTCG tax will be levied.
Your taxable LTCG will be:
INR 2,00,000 – INR 1,25,000 = INR 75,000
Your payable tax will be:
INR 75,000 x 12.5% = INR 9375
How Can You Save LTCG on Equity-Oriented Funds?
The following exemptions and deductions from the Income Tax Act may help you lower the tax obligation for LTCG on mutual funds:
- Gains up to INR 1.25 lakh in a fiscal year are tax-exempt for equity-oriented mutual funds. Only profits that are above this amount are liable to the 12.5% LTCG tax.
- If you invest the proceeds from the sale of a long-term asset in certain bonds within 6 months, capital gains of up to INR 50 lakhs may be excluded from tax.
Final Thought
Understanding the tax obligation for LTCG on mutual funds is crucial. This helps you save the money you received as returns. You may more effectively plan your investment strategies and optimise your after-tax returns by being informed on the holding periods, relevant tax rates, and exemptions.
If you are planning to invest in mutual funds, download the PL Capital Group – Prabhudas Lilladher application and open a Demat account for free. PL allows you to invest in a wide variety of mutual fund schemes.
Frequently Asked Questions
1. What is the tax-free amount of long-term capital gain on listed shares?
Up to INR 1.25 LTCG on listed shares is exempt.
2. What is the tax rate on long-term gains from mutual funds?
The LTCG amount is subject to a 12.5% tax rate. The tax rate is 20% if you use the indexation benefit. An exemption of INR 1.25 lakh may be used if equity-oriented mutual funds are sold.
3. What is the long-term capital gains maximum tax rate?
For all capital assets, the LTCG tax rate is 12.5%. The LTCG beyond INR 1.25 lakh would be subject to flat taxation at 12.5% for listed equity shares, equity-oriented funds, and business trust units.
4. Does the selling of stocks or mutual funds incur TDS?
No, capital gains from selling mutual fund units are excluded from TDS under Section 194K of the Income Tax Act.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
