Common things to know about LTCG on mutual funds
The capital gains tax category has undergone a lot of changes recently. Even the most well-informed investors may not know how these changes affect the returns on their investments. Both Short-term Capital Gains (STCG) and Long-term Capital Gains (LTCG) from mutual funds are now governed by new tax rules. While some tax benefits of investing in capital assets have remained the same, others have undergone radical changes.
If you have already invested in mutual funds or are planning to invest in them, the new capital gains tax will be applicable to your investment. Let’s look at the tax levied on short-term and long-term capital gains on mutual funds.
- Table of contents
Things to know about LTCG and STCG Tax on mutual funds
Here are a few facts about mutual fund LTCG and STCG tax:
- Capital gains in equity and equity-oriented funds: Mutual funds are taxed based on the investment horizon and the type of securities invested in. The capital gains made from equity funds and equity-oriented hybrid funds for a duration of less than 12 months are taxed under the Short-term Capital Gains (STCG) tax category at a flat rate of 15% (plus applicable surcharges and 4% cess). The capital gains from equity and equity-oriented funds for more than 12 months fall in the Long-term Capital dGains (LTCG) category. The tax rate on LTCG MF is 10% without indexation (plus applicable surcharges and 4% cess) if the long-term capital gain is more than Rs. 1 lakh in a financial year.
- Capital gains in debt and debt-oriented funds: According to the new debt fund taxation rules, the gains will be added to the investor's taxable income and taxed as per their tax slab. All gains on debt fund units acquired on or after 1 April 2023 shall be considered as STCG irrespective of the holding period.
- Indexation: Indexation used to help investors adjust the purchase price of their mutual fund investments to lower their tax liability on capital gains from their investments in debt funds. According to the new debt taxation rule, the indexation benefit on LTCG is no longer available for investments undertaken on or after 1 April 2023.
Securities transaction tax (STT)
In addition to capital gains tax, there is another type of tax that investors may have to pay when they invest in equity-oriented funds. It is called the Securities Transaction Tax (STT). It is a direct tax levied on the sale and purchase of securities listed on the recognized exchanges of India. The stock exchange collects STT from the purchaser and pays it to the government. Select Exchange-traded Funds (ETFs) like Gold ETFs are exempt from STT.
In conclusion, long-term capital gains are profits that investors get from the sale of equity and equity-oriented funds after holding them for over 12 months. LTCG are taxed at a lower rate than STCG. A sound knowledge of these tax implications can help investors create investment strategies and make well-rounded investment decisions to maximize the return potential of their investments.
FAQs
What are the tax benefits of investing in Equity Linked Saving Schemes (ELSS)?
By investing in ELSS, you can avail tax deductions under section 80C of the Income Tax Act, 1961. ELSS investments are subject to a lock-in period of 3 years and are eligible for a tax deduction of up to Rs. 1.5 lakh.
What are capital gains in mutual funds?
A capital gain in mutual fund arises when there is an appreciation in the price of mutual fund units. The capital gains from mutual funds are usually taxed at the hands of investors.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.