Invest in Mutual Funds &
Get More Returns

Start Investing

The 2018-19 Union Budget brought the long term capital gains (LTCG) on equity funds under tax bracket. It called for a change in the strategy in which investors used to deal with the redemption of equity fund units.

This article covers the following:

  1. What is Long Term Capital Gain (LTCG) tax on Equity Funds?
  2. How are Equity Funds taxed?
  3. How to manage LTCG tax on Equity Funds?
  4. How to Invest in Equities?

1. What is Long Term Capital Gain (LTCG) tax on Equity Funds?

Redemption of equity mutual funds generates capital gains which attract tax. The rate at which the gains will be 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 which 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 tax umbrella. This has resulted in investors looking for innovative ways to tackle the changes in taxation. However, the LTCG on equity funds can be easily managed through simple methods.

2. How are Equity Funds taxed?

Budget 2018 specified how the LTCG on equity funds would be taxed. The following modifications were introduced during the Budget presentation:

  • Beginning from 1 April 2018, the long-term capital gains over Rs.1 lakh on sale of units of equity funds are taxable at the rate of 10% without the benefit of indexation.
  • All the existing investors will get an exemption on the capital gains made up to 31 Jan 2018. The capital gains made after the cut-off date will attract tax liability.

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.

Suppose you purchased units of equity funds for Rs.120 on 1 October 2018 and sold them on 29 November 2019 at Rs.140. The Net Asset Value (NAV) of the Stock was Rs.130 as on 31 January 2019. Out of the capital gains of Rs.20 (i.e. 140-120), Rs.10 (i.e. 130-120) is not taxable. The balance of Rs.10 is taxable as long-term capital gains at the rate of 10% without the benefit of indexation, assuming your total gains are more than Rs.1 lakh.

3. How to manage LTCG tax on Equity Funds?

The introduction of tax on long term capital gains (LTCG) on equity funds need not deter you from taking advantage of the stock markets. You can still build wealth in a stress free manner. Depending on the manner in which you do 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:

  • Ensure complete understanding of the equity fund scheme before making an investment decision. This will prevent you from sticking to wrong funds so that there are no unplanned exits which attract tax liability. Analyse the fund both qualitatively as well as quantitatively. In case you find it challenging to make the right choice, consult a professional adviser to reduce the probability of incurring losses.
  • Avoid frequent buying and selling of units of the equity fund. Investing in stock markets should be looked upon as a long-term investment. Select those funds which have been in the said domain for an extended period, say at least five years. This will ensure that the funds have faced the ups and downs of the market resiliently.
  • It would be best if you kept in mind that the upper limit of exemption of long term capital gains is Rs.1 lakh annually. Try to make the best use of this upper limit effectively by selling the units which are not meeting your expectations.
  • Invest in equity funds from an overall financial planning point of view. Your entry and exit have to be timed as per your investment horizon and personal goals.
  • Under ordinary conditions, the long-term equities have given a better inflation-adjusted performance. Also, owing to higher after-tax returns, the long-term equity funds have performed better than debt funds.

4. How to invest in Equity Funds?

Investing in equities can turn out to be complicated many a time. In case you do not possess enough financial knowledge, and you are finding it too difficult to understand, then visit ClearTax Invest. Here, instead of directly investing in equities, you can try investing in equity funds. You can choose hand-picked equity funds in a hassle-free and paperless manner.

Using the following steps, you can start your investment journey:

Step 1: Sign in at cleartax.in.
Step 2: Fill the required details such as the amount of investment and period of investment.
Step 3: Get your e-KYC done in less than 5 minutes.
Step 4: Invest in your preferred hand-picked mutual fund.

Make Small Investments for Bigger Returns

Start SIP Now