How to calculate Capital Gains Tax

Learn How to calculate capital gains tax with this blog.
Calculate capital gains tax
3 min
24-April-2024

When you invest in mutual funds, you earn different types of income. Some funds offer periodic payouts of a portion of their profits, known as dividends. Additionally, if you redeem your mutual fund investments at a profit, you earn capital gains. Before you make a lump sum or SIP investment in mutual funds, you should know how to calculate capital gains tax on mutual funds.

In this article, we take a closer look at what capital gains are, how they are classified based on the holding period of the funds and how to calculate capital gains tax on mutual funds.

What are capital gains on mutual funds?

The term capital gains refers to any profits made from the sale of a capital asset. Since mutual fund schemes are financial capital assets, any profits you earn when you redeem your mutual fund investments are classified as capital gains. These gains may be added to your total income and taxed at the income tax slab rate that applies to you, or they may be taxed at a different flat rate.

Different categories of mutual funds for tax purposes

To understand the fundamentals of how to calculate capital gains tax on mutual funds, it is necessary to first become familiar with the different categories of mutual funds for tax purposes. Primarily, we have three categories, as outlined below:

  • Equity mutual funds (that invest 65% or more in equity):
    These are mutual funds that invest at least 65% of their assets in equity and equity-related instruments. Some examples of such funds include equity mutual funds, arbitrage funds and aggressive hybrid funds.
  • Debt mutual funds (that invest 65% or more in debt):
    These mutual funds invest at least 65% of their assets in debt instruments and securities. Some examples of funds in this category include debt mutual funds, floater funds and conservative hybrid funds.
  • Other mutual funds (that invest over 35% but below 65% in equity):
    These funds invest in both debt and equity. However, the percentage of investment in equity is between 35% and 65% of the total assets. Balanced hybrid funds typically belong in this category as they invest 40% to 60% of their assets in equity (and the rest in debt).

Capital gains tax on the different categories of mutual funds

Now that you have seen the different types of mutual funds for tax purposes, let us delve into the types of capital gains and the tax rates applicable to them. Based on the holding period of the fund’s units before redemption, the profits can be any one of two types: Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG).

Here is how the holding period affects the type of capital gains for the three different categories of funds.

  • Capital gains on equity mutual funds
    If the holding period is less than 12 months, the profits from the sale of equity funds are considered to be STCG and taxed at a flat rate of 15%. If the holding period is 12 months or more, the gains are LTCG and taxed at 10% without indexation benefits.
  • Capital gains on debt mutual funds
    As per a recent amendment introduced in Budget 2023, capital gains from the transfer of debt funds and hybrid debt funds are always considered to be STCG and taxed at the income tax slab rate applicable to you. This has been in effect from April 1, 2023.

Conclusion

Now that you know how to calculate LTCG tax and STCG tax on mutual funds, you can plan your mutual fund investments smartly. Your choice of mutual funds may depend on your risk tolerance, expected returns and tax planning needs. To find the mutual fund scheme that best suits these criteria, check out the 1,000+ funds available on the Bajaj Finserv Mutual Funds Platform. You can even compare mutual funds available and make an informed choice for your portfolio.

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Frequently asked questions

Can you avoid capital gains tax on mutual funds?

No, it is not possible to do this. However, the only exception is if you earn LTCG from mutual funds. Such gains are exempt from tax up to Rs. 1 lakh.

Are capital gains from mutual funds tax-free up to Rs. 1 lakh?

Yes, long-term capital gains from equity funds and hybrid equity-oriented funds are tax-free up to Rs. 1 lakh. On LTCG from these funds exceeding Rs. 1 lakh, you need to pay tax at 10%.

How to calculate capital gains?

To calculate capital gains from mutual funds, you need to subtract the purchase cost (or indexed purchase cost where applicable) from the sale or redemption value.