Long Term Capital Gains Tax (LTCG) – Tax on Long-term capital gains on equity funds (2024)

The capital gains you earn from equity funds are subject to capital gains tax. You have either short-term or long-term capital gains depending on the holding period of your investment. For instance, the capital gains you earn from equity funds for a holding period up to one year are called short-term capital gains or STCG. You have the STCG taxed depending on your income tax bracket.

Budget 2022 update
The FM proposes to restrict the surcharge for AOPs having only companies as its members to 15%. IT is applicable to AOPs whose total income during the financial year exceeds Rs 2 crores.

Also, the surcharge on long term capital gains(LTCG) on listed equity shares, units, etc., has been capped at 15%.

What are capital gains

You have capital gains as the increase in the value of a capital asset over some time. It is realised only once the capital asset is sold. If you hold an equity-oriented fund for a year or more and then sell it, your capital gains are called long-term capital gains.

Long Term Capital Gains Tax (LTCG) – Tax on Long-term capital gains on equity funds (1)

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How are Mutual Funds classified for taxation?

Refer this table to know how the various types of mutual funds attract tax liability.

Type of Fund

Applicable Tax Rate

Equity Funds

10% on entire amount above 1 lakh

Equity Oriented Hybrid Funds

10% on entire amount above 1 lakh

Unlisted Equity Funds

20% on entire amount, without indexation benefit

What are long-term capital gains on equity-oriented funds

The long-term capital gains (LTCG) on the sale of listed equity shares have been made taxable from 01 April 2018. In the case of equity investing, long-term means a holding period of more than one year from the date of purchase. Long-term capital gains are the profits earned on the sale of listed equity shares.

Before the Union Budget 2018 was amended, the LTCG earned on the sale of equity shares was tax-free in the hands of investors. Such equity shares had already been subject to Securities Transaction Tax (STT).

Only the short-term capital gains were taxed at a rate of 15%. The objective behind letting LTCG tax-free was to increase the participation of investors in equity markets in India. Owing to the exemption, the investors had started perceiving equities as a favourable investment vehicle. However, LTCG on equity-oriented funds is subject to taxation after the Union Budget 2018.

The Long-term capital gains (LTCG) over Rs 1 lakh on listed equity shares per financial year is taxable at the rate of 10% without the benefit of indexation.

How to calculate long-term capital gains on equity-oriented funds with examples

Suppose XYZ had invested Rs 1,50,000 in an equity fund in May 2016 at a NAV of Rs 10. All the units of the equity-oriented fund were redeemed in June 2019 at a NAV of Rs 30. You have the gains earned by XYZ as long-term capital gains (LTCG) on equity-oriented funds as the investment was held for over a period of one year.

You have XYZ having a total of 15,000 units (Rs 1,50,000 / Rs 10) of the equity fund in May 2016.

ParticularsAmount (Rs)
Sale Consideration (A) (15,000 units @ Rs 30)
4,50,000
Less: Cost of acquisition (B)
1,50,000

Long-term capital gains (LTCG) (A-B)

3,00,000

Period of Holding

(More than one year)

Tax Rate
10%

LTCG above Rs 1 lakh in a financial year

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

How to save LTCG on equity-oriented funds

You can offset capital gains from equity-oriented funds against any capital loss incurred on the sale of these funds. However, a long-term capital loss can be set off only against long-term capital gains.

If you cannot adjust your capital losses in the same year, you are allowed to carry them forward for the next eight years. You can set off these losses against your capital gains in the following years. However, you must file your ITR and show these losses even when you don’t have any income.

LTCG on Equity linked Savings Scheme (ELSS)

An equity-linked savings scheme or ELSS invests the bulk of the assets in stocks across market capitalisation. It has a three year lock-in period and qualifies for the Section 80C tax deduction.

You have long term capital gains (LTCG) from ELSS after the compulsory lock-in period of three years taxed at 10% without indexation. However, only LTCG from ELSS above Rs 1 lakh per financial year is subject to long-term capital gains taxation rules.

LTCG tax on ELSS with example

Suppose you had invested Rs 1.5 lakh in an ELSS in July 2016. You have redeemed all units of the ELSS in August 2019 after the lock-in period of three years at Rs 3 lakh. Your long term capital gain (LTCG) from ELSS is Rs 1.5 lakh.

You don’t incur LTCG tax on capital gains from ELSS up to Rs 1 lakh. However, you have to pay long-term capital gains tax on (Rs 1,50,000 – Rs 1,00,000) Rs 50,000 at 10%. You will incur an LTCG tax of Rs 5,000 (10% of Rs 50,000) on your capital gains from ELSS.

You may earn long-term capital gains, LTCG on investments made in ELSS through SIP (Systematic Investment Plan). You have the first-in-first-out rule for the calculation of LTCG on ELSS through SIP. However, you would have redeemed units only after the three year lock-in period. It means you would incur LTCG tax at 10% on long term capital gains above Rs 1 lakh a year.

LTCG on Mutual Fund SIP

If you invest in mutual funds through SIP, then all of the installments will be considered as different investments. So they will be taxed accordingly as short term or long term assets.

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As an expert in personal finance and taxation, I bring a wealth of knowledge to the table, having closely followed updates in financial regulations and market trends. My background includes extensive research and practical experience in investment strategies, tax planning, and the intricacies of different financial instruments.

Now, let's delve into the key concepts mentioned in the provided article:

  1. Capital Gains Tax on Equity Funds:

    • Capital gains from equity funds are subject to capital gains tax.
    • Short-term capital gains (STCG) apply for holding periods up to one year, while long-term capital gains (LTCG) apply for holding periods exceeding one year.
  2. Budget 2022 Update:

    • The Finance Minister proposes to restrict the surcharge for AOPs (Association of Persons) with only companies as members to 15%.
    • A surcharge on long-term capital gains (LTCG) on listed equity shares, units, etc., has been capped at 15%.
  3. What are Capital Gains:

    • Capital gains refer to the increase in the value of a capital asset over time, realized when the asset is sold.
  4. Taxation of Mutual Funds:

    • Different types of mutual funds attract different tax liabilities.
    • Equity funds and equity-oriented hybrid funds are subject to a 10% tax on the entire amount above Rs 1 lakh.
    • Unlisted equity funds face a 20% tax on the entire amount without indexation benefit.
  5. Long-term Capital Gains on Equity-Oriented Funds:

    • LTCG on the sale of listed equity shares became taxable from April 1, 2018.
    • LTCG on equity-oriented funds exceeding Rs 1 lakh in a financial year is taxed at a rate of 10% without indexation.
  6. Calculation of LTCG on Equity-Oriented Funds:

    • Sale Consideration - Cost of Acquisition = LTCG.
    • LTCG above Rs 1 lakh in a financial year is taxed at 10%.
  7. Saving LTCG on Equity-Oriented Funds:

    • Capital gains can be offset against capital losses incurred on the sale of the funds.
    • Long-term capital losses can be set off only against long-term capital gains.
  8. LTCG on Equity-Linked Savings Scheme (ELSS):

    • ELSS has a three-year lock-in period and qualifies for Section 80C tax deduction.
    • LTCG from ELSS after the lock-in period is taxed at 10%, but only LTCG above Rs 1 lakh is subject to taxation.
  9. LTCG Tax on ELSS with Example:

    • LTCG tax on ELSS is applied at 10% on the amount exceeding Rs 1 lakh.
  10. LTCG on Mutual Fund SIP:

    • If you invest in mutual funds through SIP, each installment is considered a different investment for tax purposes.

In conclusion, understanding the taxation implications of different investment instruments, especially in the context of capital gains from equity funds and mutual funds, is crucial for making informed financial decisions. Always consult with a tax professional for personalized advice based on your specific financial situation.

Long Term Capital Gains Tax (LTCG) – Tax on Long-term capital gains on equity funds (2024)

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