Long Term Capital Gains Tax (LTCG) - 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 called short-term capital gains or STCG. You have the STCG taxed depending on your income tax bracket.

Budget 2024 Latest Updates

Budget 2024 has passed the following amendments effective from FY 2024-25 - 

• For classifying assets into long-term and short-term, there will only be two holding periods: 12 months and 24 months. The 36-month holding period has been removed.
• The holding period for all listed securities is 12 months. All listed securities with a holding period exceeding 12 months are considered Long-Term. The holding period for all other assets is 24 months.
• Unlisted bonds and debentures are brought in line with the taxation on debt mutual funds and market-linked debentures. They will attract tax on capital gains at applicable slab rates. (i.e., they will be treated as short-term irrespective of the period of holding.)
• For the benefit of the lower and middle-income classes, the limit on the exemption of Long-Term Capital Gains on the transfer of equity shares or equity-oriented units or units of Business Trust has increased from Rs.1 Lakh to Rs.1.25 lakh per year. However, the rate at which it is taxed has increased from 10% to 12.5%. The exemption limit to Rs.1.25 lakhs has been increased for the whole of the year, whereas the tax rate changed on 23rd July 2024.

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. 

 

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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.

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. However as per Budget 2024, for the benefit of the lower and middle-income classes, the limit on the exemption of Long-Term Capital Gains on the transfer of equity shares or equity-oriented units or units of Business Trust has increased from Rs.1 Lakh to Rs.1.25 lakh per year. However, the rate at which it is taxed has increased from 10% to 12.5%. The exemption limit to Rs.1.25 lakhs has been increased for the whole of the year, whereas the tax rate changed on 23rd July 2024.

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. 

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% (15% wef 23rd July 2024) 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%(15% wef 23rd July 2024) 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 instalments will be considered as different investments. So they will be taxed accordingly as short term or long term assets. 

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