Tax on Long-term Capital Gains on Equity Funds

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 classified as short-term capital gains or STCG and the capital gains you earn from the equity funds that are held for more than a year are classified as Long-term capital gains or LTCG. In this article, we will be learning about the taxation on long-term capital gains on equity funds.

What are Capital Gains

Capital gains are the increase in the value of a capital asset over some time. They are 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. 

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What are Long-Term Capital Gains on Equity-Oriented Funds

Equity-oriented funds invest at least 65% of their total assets in listed equities or equity-oriented instruments. The tax treatment for these funds is similar to that of listed equity shares.

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 an NAV of Rs 10. All the units of the equity-oriented fund were redeemed in September 2024 at an 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.   

In May 2016, XYZ had a total of 15,000 units (Rs 1,50,000 / Rs 10) of the equity fund. 

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, which are taxed at 10% (12.5% from 23rd July 2024) without indexation. However, only LTCG from ELSS above Rs. 1 (Rs. 1.25 lakhs from 23rd July 2024) 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 redeemed all units of the ELSS in August 2024 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 1.25 lakh. However, you have to pay long-term capital gains tax on (Rs 1,50,000 – Rs 1,25,000) Rs 25,000 at 12.5%. You will incur an LTCG tax of Rs 3,125 (12.5% of Rs 25,000) 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%(12.5% w.e.f 23rd July 2024) on long-term capital gains above Rs 1 lakh a year (Rs. 1.25 lakh w.e.f. 23rd July 2024).

LTCG on Mutual Fund SIP

If you invest in mutual funds through a SIP, the instalments will be considered different investments, and they will be taxed accordingly as short-term or long-term assets. 

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