Mutual Funds are a type of investment scheme in which funds are pooled from various investors and invested in bonds, stocks, or company shares. The Security and Exchange Board of India regulates the funds, known as SEBI.
Professional fund managers manage these investments collectively to induce long-term capital gains on Mutual Funds or short-term capital gains to provide higher returns.
Mutual Funds offer two types of returns, capital gains and dividends. A capital gain signifies the difference between the cost of purchase of a capital asset and the selling value.
For example –Mr Ghosh invested Rs. 5 Lakh in a Mutual Funds scheme on 1st August 2015. The value of the asset on 1st August 2019 was Rs. 7.5 Lakh. The long-term capital gains on Mutual Funds that Mr Ghosh earned was Rs. 2.5 Lakh.
Capital Gains on Mutual Funds
Capital gains occur when individual benefits from the capital appreciation of securities by selling or transferring them at the opportune period. A fund manager predicts that opportune moments when selling a fund would reap the most profits or gains.
These securities can be classified into two types depending on their holding period – long-term capital assets and short-term capital assets. Capital gains are differentiated based on the kind of asset sold or transferred.
If listed equity funds and equity-oriented balanced funds are held for a period less than 12 months or 1 year, then they would be considered short-term capital assets, and if they are held for a period longer than that, they would be regarded as long-term capital assets.
In the case of unlisted equity funds, debt funds and debt-oriented balanced funds if the holding period is longer than 3 years or 36 months, they are classified as long-term capital assets.
If the period is less than 3 years, it is considered short-term capital assets.
The following table demonstrates the classification–
Types of Funds | Long-term Asset | Short-term Asset |
Listed equity funds and equity-oriented hybrid funds | More than 12 months | Less than 12 months |
Unlisted equity funds | More than 36 months | Less than 36 months |
Debt funds and debt-oriented balanced funds | More than 36 months | Less than 36 months |
LTCG tax on Mutual Funds is comparatively lower than short-term capital gains tax on Mutual Funds. This taxation system has been adopted to encourage investors to keep their money invested for a longer period.
Types of Capital Assets on Mutual Funds
There are two types of capital assets on Mutual Funds, such as long term and short term. Any asset such as equity shares or equity-oriented Mutual Funds that are held by an individual for more than 12 months is regarded as a long-term capital asset.
Similarly, any capital asset such as equity shares or equity-oriented Mutual Funds held for less than 12 months, are known as short-term capital assets.
However, this consideration is applicable only if your date of transfer is after 10th July 2014 irrespective of the date of purchase.
Besides, in the case of any asset acquired as a gift or inheritance, the tenure for which the asset was held by the first owner will be considered to determine whether it is a short-term or long-term capital asset.
What is an Indexed Cost of Acquisition?
The cost of acquisition is indexed by the application of the cost inflation index, also known as CII. The reason behind this application is to adjust the inflation on your Mutual Funds asset over the years.
This calculation reduces the capital gains on Mutual Funds and increases the cost base of an individual.
FAQs
Long-term capital gains on mutual funds are available when you sell your equity shares after holding on to them for more than a year. When your long-term capital gains are above Rs 1 lakh, you will have to bear taxes on them. The LTCG on mutual funds tax rate is 10% with no indexation benefit.
How to calculate capital gains tax on mutual funds? ›
For equity-oriented mutual funds:
LTCG up to ₹1 lakh in a financial year are tax-exempt. Any LTCG exceeding ₹1 lakh is taxed at a rate of 10% without indexation benefit. STCG on equity-oriented mutual funds are taxed at a flat rate of 15%.
What is the 100000 exemption for long term capital gains? ›
An exemption of up to Rs. 1 lakh is available each financial year for LTCG tax on sale of shares or mutual fund units. Investors can time the exit from their investments by spreading the redemption over two financial years to avail of the tax exemption limit for both years.
What are the exemptions available for long term capital gains? ›
Adjustment of Long-term Capital Gain (Exemption)
The exemption limit is Rs. 5,00,000 for resident individual of the age of 80 years or above. The exemption limit is Rs. 3,00,000 for resident individual of the age of 60 years or above but below 80 years.
How do you calculate long-term capital gain on a mutual fund? ›
Long-term capital gain = Final Sale Price - (indexed cost of acquisition + indexed cost of improvement + cost of transfer), where the indexed cost of acquisition equals the cost of acquisition x cost inflation index of transfer/cost inflation index of acquisition.
How to avoid capital gains tax on mutual funds? ›
Hold Funds in a Retirement Account
This means you can sell shares of your mutual fund or collect a capital gains distribution without paying the relevant taxes so long as you keep the money in that retirement account. You will ultimately owe any related taxes once you withdraw the money, of course.
How much tax do you pay on long term mutual fund gains? ›
You make long-term capital gains on selling your equity fund units after holding them for over one year. These capital gains of up to Rs 1 lakh a year are tax-exempt. Any long-term capital gains exceeding this limit attracts LTCG tax at 10%, without indexation benefit.
How is mutual fund long term capital gain income taxed? ›
Debt mutual funds are used to invest in debt instruments from the market. The long term capital gain tax rate on mutual funds is 20% after indexation, which adjusts the acquisition cost for inflation using the Cost Inflation Index (CII).
Do you pay taxes on mutual fund gains every year? ›
The funds report distributions to shareholders on IRS Form 1099-DIV after the end of each calendar year. For any time during the year you bought or sold shares in a mutual fund, you must report the transaction on your tax return and pay tax on any gains and dividends.
Do you pay capital gains after age 65? ›
Whether you're 65 or 95, seniors must pay capital gains tax where it's due.
For individuals over 65, capital gains tax applies at 0% for long-term gains on assets held over a year and 15% for short-term gains under a year. Despite age, the IRS determines tax based on asset sale profits, with no special breaks for those 65 and older.
Do people over 70 pay capital gains? ›
The IRS allows no specific tax exemptions for senior citizens, either when it comes to income or capital gains. The closest you can come is contributing to a Roth IRA or Roth 401(k) with after-tax dollars, allowing you to withdraw money without paying taxes.
How do you qualify for capital gains exemption? ›
The seller must have owned the home and used it as their principal residence for two out of the last five years (up to the date of closing). The two years do not have to be consecutive to qualify. The seller must not have sold a home in the last two years and claimed the capital gains tax exclusion.
What is the 121 reduced gain exclusion loophole? ›
Section 121 of the Internal Revenue Code, which is often referred to as the 121 exclusion, generally allows homeowners to sell real property held (owned) and used (lived in) as their primary residence and exclude from their taxable income up to $250,000 in capital gains per homeowner, and up to $500,000 in capital ...
Do you pay long-term capital gains on mutual funds? ›
Like income from the sale of any other investment, if you have owned the mutual fund shares for a year or more, any profit or loss generated by the sale of those shares is taxed as long-term capital gains. Otherwise, it is considered ordinary income.
What is the limit of capital gains on mutual funds? ›
Fund Types and Corresponding Tax Rates:
Equity Funds and Hybrid Equity-Oriented Funds: For holding periods that are shorter than 12 months, the tax rate is 15%. For more than 12 months, the tax rate is 10%, but it's exempted for gains up to Rs 1 lakh.
How much tax do you pay when you sell a mutual fund? ›
Short-term capital gains (assets held 12 months or less) are taxed at your ordinary income tax rate, whereas long-term capital gains (assets held for more than 12 months) are currently subject to federal capital gains tax at a rate of up to 20%.
Do all mutual funds pay out capital gains? ›
All mutual funds, including index funds, are required to pay out any realized gains to shareholders on a pro-rata basis at least once a year. Typically, actively managed equity mutual funds do so annually in the form of short-term and long-term capital gains.
