Long term capital gain tax on equity mutual fund is the tax is levied on the profits earned from selling equity-oriented mutual funds held for more than a year. Since coming into force in the 2018 Union Budget, it has been one of the key drivers of investment strategy both for retail and institutional investors. Long term capital gain tax on equity mutual fund is an integral aspect to investment and tax planning in India. You must be aware of the LTCG tax because it has a direct bearing on the net returns from your investments. Moreover, the fine-tuning of this landscape in tax is happening constantly with the last update in the 2024 Union Budget. So it is imperative for investors to stay informed about the latest regulations and their implications.

Capital gains refer to income made from selling a capital asset such as stocks, real estate, or mutual funds at a price higher than the purchase price. In the context of mutual funds, capital gains occur when you redeem your units at a higher Net Asset Value compared to the purchase NAV. These gains form an integral part of the returns on investment and are subject to taxation under the relevant sections of the Income Tax Act. Further, such capital gains can be divided into two distinct categories – short term and long term, based on the holding period of the investment. These classifications determine the applicability of the tax rates and will go on to make a huge difference in your investment strategy.

Mutual funds are subject to taxation based on the type of fund and the duration for which the investment is held. This classification is pivotal as it affects how the capital gains from these investments are taxed.

Equity funds and equity-oriented hybrid funds enjoy similar tax treatment, with long term gains taxed at 12.5% on amounts exceeding Rs. 1.25 lakh annually. Moreover, unlisted equity funds are also equitably taxed at 12,5% without indexation benefits,. These tax implications are key when investing in mutual funds.

Long term capital gain tax on equity mutual fund refers to returns gained through the sale of equity-oriented mutual funds held for more than one year. Such capital gains are an important factor for investors targeting long term wealth creation through the equity market. Until the proposal of the 2018 Union Budget, LTCG on equity-oriented funds remained fully tax-exempt, which made them an attractive option for investors seeking growth with zero income tax.

However, in a major shift in tax treatment, the 2018 Union Budget introduced a 10% tax on LTCG of over Rs. 1 lakh. This move was part of a broader effort to create a more balanced tax structure across various financial assets and to enhance government revenue. The 2024 Union Budget further deepened the rate of LTCG tax to 12.5% on gains over and above Rs. 1.25 lakh, which worked more on the government's intention of rationalising and aiming at reaching relative standardisation in the policies of tax across investment vehicles better.The imposition of the LTCG tax now requires very cautious consideration by the investors toward its impact on overall returns in financial planning and strategic decisions with respect to the time of redemption to gain maximum after-tax returns.

To calculate the long term capital gain tax on equity mutual fund requires you to know the correct purchase price, sale price, and the holding period of your mutual fund units. The formula is easy, as follow:
 

LTCG = Sale Price − Purchase Price
 

Example: Let us say you invested Rs. 2 lakh in an equity-oriented mutual fund in January 2020. By January 2024, the value of your investment has grown to Rs. 4.5 lakh. Your LTCG would be Rs. 2.5 lakhs. Given the exemption limit of Rs. 1.25 lakh, the taxable amount would be Rs. 1.25 lakh which is subject to a 12.5% tax rate. Thus your tax liability would be Rs. 15,625.
 

This examples illustrates the innate importance of accurately calculating the long term capital gain tax on equity mutual fund, to ensure compliance with tax regulations and effective financial planning. However, the technicalities of this calculation can be complex, particularly with systematic investment plans where each installment has its own purchase price and holding period.

Staying well-informed and strategic planning may help in saving long-term capital gains tax on equity-oriented funds. First, maximise the Rs. 1.25 lakh standard exemption by timing your redemptions across two or three financial years. Reduce your tax liability by harvesting losses and offset your yearly gains against losses from other underperforming investments. Opt for tax-efficient funds designed to minimise taxable distributions. Holding your investments long-term ensures your gains are taxed at a lower rate, benefiting from market growth and compounding returns. Moreover, contributions to ELSS also get deductions under Section 80C up to Rs, 1.5 lakh per annum reducing overall taxable income. These strategies therefore have you optimize your returns while keeping long-term capital gains tax impact at bay.

Equity-Linked Savings Schemes (ELSS) are mutual funds that offer tax benefits under Section 80C of the Income Tax Act. These are a popular class of investment assets. Moreover, any kind of investment in an ELSS fund carries a compulsory lock-in period of three years during which you cannot redeem your investments. However, this is one of the shortest lock-in periods compared to other tax-saving instruments thereby making ELSS quite an attractive option. As of the 2024 Union Budget, LTCG on ELSS is taxed at 12.5% on gains exceeding Rs. 1.25  lakh. This tax is applicable without indexation benefits meaning that the inflation-adjusted cost of acquisition cannot be used to reduce the taxable amount. Even with this, the ELSS continues to remain a very attractive option since it gives high returns accompanied by upfront tax deduction under Section 80C.

Let us assume that you had invested Rs. 1.5 lakh in an ELSS in January 2020 and that by January 2024, your investment grew to Rs. 3.5 lakh. Now, the LTCG from this investment would be Rs. 2 lakh. Under the old regime, 10% tax is payable on gains exceeding Rs. 1 lakh, and so you would have ended up paying Rs. 10,000 in tax. With the new 12.5% rate coming into effect from 2024, your tax liability goes up to Rs. Rs. 12,500. This example underscores the importance of staying informed about changes in tax regulations and their impact on your investments. While the upfront tax benefit of ELSS under Section 80C is huge, investors will still have to take into account the LTCG tax while planning for financial goals. The increased tax rate may prompt some investors to explore other tax-saving options or to adjust their investment strategies within ELSS to optimise their overall returns.

SIPs are a popular way to invest in mutual funds. However, when it comes to taxation, each SIP installment is treated as a separate investment with its own purchase date and holding period. This means that the LTCG tax on SIP investments needs to be calculated separately for each installment. For example, if you started a SIP in January 2020, and you redeem your investments in January 2024, the LTCG for each SIP installment will be calculated based on the difference between the NAV at the time of purchase and the NAV at the time of redemption. The holding period for each installment must exceed one year for the gains to qualify as long term and be eligible for the lower LTCG tax rate. SIP investors should be aware of these tax implications and consider them when planning redemptions and rebalancing their portfolios.

The tax landscape for mutual fund investments has evolved since the introduction of the long term capital gain tax on equity mutual fund in 2018. With the 2024 Union Budget further increasing tax rates and adjusting exemption limit, be it investing in mutual funds, opting for ELSS, or using SIPs, it is key to plan for the tax implications and optimise your returns. Moreover, effective tax planning, including strategies to save on long term capital gain tax, can substantially better your net returns and help align your investments with your financial goals. Furthermore, to make informed investment decisions, leverage tools like the Mutual Fund Calculator and compare mutual funds to select the best options. Start your journey today by exploring the comprehensive Bajaj Finserv Platform, offering over 1,000 mutual fund schemes to help you build a strong and diversified portfolio.