Long Term Capital Gain on Mutual Funds

Mutual Funds is a type of investment scheme where funds are pooled from various investors which are invested in bonds, stocks or company shares. The funds are regulated by the Security and Exchange Board of India, known as SEBI.

These investments are managed by professional fund managers collectively to induce long term capital gains on Mutual Funds or short term capital gains to provide higher returns.

What Are Capital Gains? 

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 on 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.

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, they 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 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.

Taxes

The capital gain on long term Mutual Funds, prior to 2018, fell under the tax bracket of 0%, 15% and 20%. With the amendment of Tax Cuts and Jobs Act, long term capital gain are taxed in the following manner –

Type of tax Rate Condition 
Long term capital gain 10% above Rs. 1 Lakh Sales of units of equity-oriented funds and equity shares
Long term capital gain on Mutual Funds 20 % Except for sales of units of equity-oriented funds and equity shares

Exemptions on capital gains

As discussed above, while calculating your LTCG in Mutual Funds, you are required to deduct the tax exempted amount. Given below is the section under which you can claim such exemptions.

Section 10(38) 

Under this section, long term capital gain arising after the transfer of equity-oriented Mutual Funds or equity shares are free from taxes under the following circumstances.

  1. The transfer should have been made on or after 1st October 2004.
  2. It should be a long term asset.
  3. The sale transaction is required to be liable to the security transaction tax.

Section 54 F

Under this section, you claim tax benefits on sales of an asset from long term capital gain on mutual funds.

These exemptions can be claimed under the circumstances of –

  • You are required to purchase an asset one year prior or after two years from the date of sales.
  • You can also construct a property with your capital gain from sales. In such cases, the construction should be completed within three years from the date of transaction.

How to Calculate the Payable Tax against Long Term Capital Gains on Mutual Funds? 

To calculate the payable tax against LTCG on Mutual Funds, you are required to be accustomed to some specific terms as discussed below.

  • Cost of acquisition –value with which a seller has acquired the capital asset. 
  • Full value of consideration – consideration received or yet to be received by a seller in a result of a transfer of his capital asset.

Calculation: 

For example, if Mr Das purchased shares in August 2016 at Rs. 50,000 and is sold in July 2018 at Rs. 3 Lakh (tenure more than 12 months) the income will be considered as a long-term capital gain.

To calculate long term capital gain on Mutual Funds –

  1. Full value of consideration: Rs. 3 Lakh
  2. Cost inflation index or CII for the mentioned year – 280 , hence the indexed cost of acquisition is Rs – 50,000 X (280/100) = Rs. 1,40,000
  3. The total taxable gain is Rs. 3 Lakh – Rs. 1,40,000 = Rs. 1,60,000

Referring to the above table Mutual Funds LTCGabove Rs. 1 Lakh is taxed at 10% = Rs. 1,60,000 X 10% = Rs. 16,000.

Hence the tax payable amount on income will be Rs. 16,000 for the above mentioned example.

What is an indexed cost of acquisition? 

The cost of acquisition is indexed by the application of 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.

In addition to the above, long term capital gain on Mutual Funds depends on the market volatility and hence provides you with considerable returns. The tax amendments are applicable if the funds are held for more than one year from the date of allotment.


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