Long Term Capital Gains (LTCG) tax on Mutual Funds

When you invest in mutual funds online, you generate capital gains if you sell your portfolio securities for a profit. Depending on the period of your investment holding, capital gains are classified as short-term or long-term capital gains. Both capital gains have different tax implications. If you sell your equity mutual funds online before one year, you will generate short-term capital gains and pay short-term capital gains tax. Alternatively, if you sell your securities after holding them for longer than one year, you will generate long-term capital gains and pay long-term capital gains (LTCG) tax on your mutual funds online.

Here is a quick guide about long-term capital gains (LTCG) tax on mutual funds online:

What are long-term capital gains?

The profits you generate by selling units of mutual funds online are capital gains. Capital gains are divided into – short-term and long-term capital gains, depending on the category of your mutual funds. In terms of equity mutual funds, short-term capital gains arise when you sell units of mutual funds before 12 months from the date of purchase. If you hold equity mutual funds online for longer than 12 months, your profits are known as long-term capital gains.

In terms of debt funds, short-term capital gains are realized in less than 36 months, whereas long-term capital gains arise in 36 months or longer. If you have equity-oriented hybrid mutual funds or debt-oriented hybrid mutual funds, the short-term capital gains arise in less than 12 months, and long-term capital gains generate in 36 months or longer.

The short-term and long-term capital gains are taxed differently.

What is the long-term capital gains tax on mutual funds?

Long-term capital gains tax is charged differently depending on the types of gains from mutual funds online.

  • LTCG tax on equity funds: If you sell units of your equity mutual funds onlineafter a holding period of one or more years, you will be liable to pay an LTCG tax at the rate of 10% + cess + surcharge. There is no indexation benefit granted. However, the LTCG tax is levied when the capital gains generated are more than Rs 1 lakh in a financial year.
  • LCTG on debt funds: Long-term capital gains in debt mutual funds arise when you sell units of your debt fund after holding them for three years or longer. In this condition, your LTCG is taxed at 20% after indexation. You also have to pay cess and surcharge on tax.
  • LCTG on hybrid funds: Long-term capitalgains in hybrid funds are taxed depending on the composition of hybrid funds. If you invest in equity-oriented hybrid funds and sell your units after one year, you incur LTCG. LTCG above Rs. 1 lakh from hybrid equity funds are taxable at 10% + cess + surcharge. Alternatively, if you invest in debt-oriented hybrid funds and sell your mutual funds online after three years of holding, you will pay LTCG tax at 20% + cess + surcharge.

Holding your mutual funds online for longer than one year enables you to stay consistent with your financial goals while minimizing taxes. Irrespective of the SIP (Systematic Investment Plan) or lump sum investment mode, the taxation on capital gains remains the same.

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