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LTCG on Mutual Fund: Tax Implications on Long-Term Gains   

Author : Badal Here | Published On : 02 May 2024

 

The capital gains tax landscape has witnessed significant changes recently, leaving even the most astute investors uncertain about how these revisions might impact their investment returns. Both Short-term Capital Gains (STCG) and Long-term Capital Gains (LTCG) from mutual funds are now subject to new tax regulations. While some tax advantages associated with investing in capital assets have remained consistent, others have undergone substantial modifications. 

 

Whether you are already invested in mutual funds or contemplating entering the market, it's crucial to understand how the updated capital gains tax structure affects your investment. Let's discuss the tax implications for short-term and long-term capital gains on mutual funds. 

 

Key Points About LTCG and STCG Tax on Mutual Funds 

 

Here are several important aspects to consider regarding mutual fund LTCG and STCG tax: 

 

1. Taxation of Equity and Equity-Oriented Funds 

 

  • Mutual fund taxation is influenced by the investment duration and the types of securities held.  
  • Short-term capital gains arise when investments in equity funds and equity-oriented hybrid funds are held for less than 12 months. These gains are subject to a flat STCG tax rate of 15%, plus applicable surcharges and a 4% cess. 
  • On the other hand, long-term capital gains from equity and equity-oriented funds, held for over 12 months, fall under the LTCG category. LTCG on mutual funds are taxed at a rate of 10% without indexation, plus applicable surcharges and a 4% cess, if the long-term capital gain exceeds Rs. 1 lakh in a financial year. 

 

2. Taxation of Debt and Debt-Oriented Funds 

 

  • The new debt fund taxation rules stipulate that gains will be included in the investor's taxable income and taxed according to their applicable income tax slab rate. 
  • All gains on debt fund units acquired on or after 1 April 2023 are considered as STCG, regardless of the holding period. 

 

3. Indexation 

 

  • Previously, indexation allowed investors to adjust the purchase price of their mutual fund investments, reducing their tax liability on capital gains from debt funds. However, under the new debt taxation rule, indexation benefits on LTCG are no longer available for investments made on or after 1 April 2023. 

 

Securities Transaction Tax (STT) 

 

Apart from mutual fund capital gains tax, investors may also incur Securities Transaction Tax (STT) when investing in equity-oriented funds. STT is a direct tax imposed on the sale and purchase of securities listed on recognized Indian exchanges. The stock exchange collects STT from purchasers and remits it to the government. Certain Exchange-traded Funds (ETFs), such as Gold ETFs, are exempt from STT. 

 

Conclusion 

 

In summary, long-term capital gains refer to profits generated from the sale of equity and equity-oriented funds held for over 12 months. LTCG are subject to lower tax rates compared to STCG. Understanding these tax implications empowers investors to devise effective investment strategies and make well-informed decisions to maximize the potential returns on their investments. 

 

Disclaimer: Mutual fund investments are subject to market risks, read all scheme-related documents carefully.