Maximize tax savings
up to ₹46,800 easily
0% commission • Earn upto 1.5% extra returns
The Union Budget 2018-19 brought back the long-term capital gains (LTCG) tax on equity-oriented mutual funds. It called for a change in the strategy in which investors used to deal with the redemption of equity fund units to avoid the impact of taxation.
Redemption of equity mutual funds may generate capital gains that attract tax. The rate at which the gains are taxed depends on the holding period. The holding period refers to the tenure for which you remain invested in the equity fund. If you sell the units of equity funds after one year from the date of allotment, such a holding period would be termed as long term. The gains, thus, made on the sale of units that were held for more than one year are called long-term capital gains (LTCG).
Conversely, the gains made on the sale of units of equity fund within one year from the date of allotment are known as short-term capital gains (STCG). Earlier, the long-term capital gains (LTCG) made on the sale of equity fund units were exempt from tax. However, post Budget 2018, the LTCG on equity funds are now under the tax umbrella. This has resulted in investors looking for innovative ways to tackle the changes in taxation rules. However, the LTCG on equity funds can be easily managed through simple methods.
The Union Budget 2018 specified how the LTCG on equity-oriented funds would be taxed. The following modifications were introduced during the Union Budget presentation:
You can compute long-term capital gains (LTCG) by subtracting the cost of acquisition from the sale price of equity fund units. Let us understand the taxation of LTCG of equity funds with the help of an example.
You have invested Rs 3 lakh in an equity mutual fund on September 03, 2015. The net asset value (NAV) of the equity fund is Rs 50. You get 6,000 units of the equity fund. You have redeemed all the units of the equity fund on August 09, 2019.
The NAV on 31 January 2018 = Rs 60.
The investment amount = Rs 60 * 6000 = Rs 3,60,000.
The NAV on 09 August 2019 = Rs 80
Your investment amount = Rs 80 * 6000 = Rs 4,80,000
The value of capital gains considered for taxation = Rs 4,80,000 – Rs 3,60,000 = Rs 1,20,000.
You have Rs 1 lakh per year exempted from long-term capital gains tax. You have to pay LTCG tax only on Rs 20,000 at the tax rate of 10% which translates to Rs 2,000.
The introduction of the tax on long-term capital gains (LTCG) on equity-oriented funds should not deter you from investing in equity funds. You can still build wealth in a stress-free manner. Depending on the manner in which you do the equity mutual fund investment, you can easily reduce the effect of the LTCG tax on your returns considerably. These tips will help you to face the challenge in a streamlined way:
Investing in equity-oriented funds can be a complicated process at times if you do not have enough financial knowledge. If you are finding it hard to pick suitable equity funds, then contact us. You can invest in the equity funds hand-picked by our in-house experts in a hassle-free and paperless manner. Start your investment journey by: