How to Calculate Long-Term Capital Gain Tax on Equity Mutual Fund?

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Long-term capital gains tax on equity mutual funds is used in the share market to describe the tax levied on the profit of selling equity mutual fund units held for a certain period. You can have short or long-term capital gains depending on how long you retain your investment. For instance, short-term capital gains, or STCG, are the capital gains you make from equities funds for a holding period of up to one year. The STCG is taxable based on your income tax bracket.

A capital asset's value growth over time is referred to as capital gains. Only once the capital asset is sold is it realized. Your capital gains are long-term if you keep an equity-oriented fund for a year or more before selling it. 

What is Long-Term Capital Gain Tax on Equity Mutual Funds?

The sale of listed equity shares results in long-term capital gains (LTCG), taxable as of April 1, 2018. Long-term investing in stock refers to keeping an investment longer than a year after the acquisition date. Profits from selling listed equity shares are known as long-term capital gains.  

Before the Union Budget 2018 amendment, investors did not pay taxes on the LTCG they received on the sale of equity shares. Securities Transaction Tax (STT) had previously been applied to these equity shares.  

The 15% tax is only applied to earnings from short-term investments. It was agreed to make LTCG tax-free to increase investor participation in India's equity markets. Due to the exemption, investors began seeing stocks as a good investment option. However, following the 2018 Union Budget, LTCG on equity-oriented funds will be taxed. 

Without the advantage of indexation, long-term capital gains (LTCG) on listed equity shares over Rs 1 lakh are taxed at a rate of 10%. 

 

Example of How to Figure out Long-Term Capital Gain Tax on Equity Mutual Funds 

Let's say ABC invested Rs 1,50,000 at a NAV of Rs 10 in an equity fund in May 2016. At a NAV of Rs 30, all of the equity-oriented fund's units were redeemed in June 2019. As the investment was kept for over a year, ABC's profits are long-term capital gains (LTCG) on equity-oriented funds.   

So in May 2016, ABC had a total of 15,000 units (1,50,000/10) of the equity fund.

Information

Amount (Rs)

(15,000 units at Rs 30) is the sale consideration (A).

4,50,000

Less

1,50,000 was the purchasing cost (B).

Gains from long-term investments (LTI) (A-B)

3,000

Holding Period

More than one year

Tax rate

10%

LTCG greater than Rs. 1 lakh in a fiscal year

2,00,000 * 10% = 20,000

For tax purposes, how are mutual funds categorised?

This table shows how different mutual fund kinds affect tax liabilities.

Type of Fund

Applicable Tax Rate

Equities Funds

10% of the total sum beyond Rs. 1 lakh

Equities-focused hybrid funds

10% of the total sum beyond Rs. 1 lakh

Non-listed Equity Funds

20% of the whole amount without the advantage of indexation

How to save long-term capital gain tax on equity mutual fund

Capital losses from the sale of equity-oriented funds might be adjusted against capital gains from those funds. A long-term capital loss, however, can only be offset by long-term capital gains. You have eight years to compensate for capital losses you cannot modify in the current year. Your financial gains in the following years might offset these losses. Even if you have no income, you must file your ITR and include these losses. 

LTCG for the Equity Linked Savings Scheme (ELSS)

Most of the assets in an equity-linked savings plan (ELSS) are in equities of various market capitalizations. It is eligible for the Section 80C tax deduction and has a three-year lock-in term.  

After the three-year mandatory lock-in period, you get long-term capital gains (LTCG) from ELSS taxed at 10% without indexation. But long-term capital gains from ELSS exceeding Rs 1 lakh in a fiscal year are subject to long-term capital gains taxation regulations.  

LTCG tax on ELSS with an example 

Let's say that in July 2016, you invested Rs. 1.5 lakh in an ELSS. After the three-year lock-in period, you redeemed all of the ELSS units in August 2019 for Rs 3 lakh. Your ELSS long-term capital gain (LTCG) is 1.5 lakh rupees.   

On capital gains from ELSS up to Rs 1 lakh, you don't pay LTCG tax. However, you must pay 10% long-term capital gains tax on the difference between Rs. 1,50,000 and Rs. 100,000. On your capital gains from ELSS, you will pay LTCG tax of Rs 5,000 (10% of Rs 50,000).  
 On investments made in ELSS through SIP (Systematic Investment Plan), you may be able to receive long-term capital gains, or LTCG. You have the first-in-first-out rule for the LTCG on ELSS through SIP computation. You wouldn't have been able to redeem units until after the three-year lock-in period, though. You would pay LTCG tax at a rate of 10% on long-term capital gains exceeding Rs 1 lakh annually.

Conclusion

Mutual fund plans become increasingly tax-efficient if you hold them long. Long-term capital gains on equity mutual funds are taxed at a rate that is significantly lower than short-term capital gains. As a result, investing in mutual funds with a long-term strategy can provide you with several tax advantages. Moreover, in the contemporary era of internet trading, apps like the blinkX share market app might be beneficial. With the help of this user-friendly software, investors can easily access the stock market and trade securities, get real-time updates and complete transactions.

Long-Term Capital Gain Tax on Equity Mutual Funds FAQs

If the gain within a fiscal year exceeds Rs 1 lakh, long-term capital gains tax in equity funds is 10% + 4% cess. Up to Rs 1 lakh, long-term capital gains are completely tax-free.

Quickly or gradually liquidate your stock mutual fund assets before you hit the 1 lakh rupee limit for the financial year.

Long-term capital gains on stocks and mutual fund units up to Rs 1 lakh are not taxed under the new tax system. Gains over Rs 1 lakh are subject to a 10% tax rate.

The equities-Linked Savings Scheme, or ELSS, is the name of the tax-saving equities fund. They have a three-year lock-in period when you cannot sell or transfer the money.

'Schedule 112A' is where long-term capital gains from equity-oriented mutual funds must be disclosed. 

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