What Is Long Term Capital Gain Tax (LTCG) Mutual Funds

Read more to understand LTCG and how it will help you make informed decisions and optimise your tax planning strategy.
Long Term Capital Gain Tax
3 mins
08 Feb 2024

When it comes to investing in mutual funds and other assets, capital gains play a significant role in determining the returns on investments. Capital gains can be categorised as long-term or short-term based on the holding period of the asset. In this article, we will delve into the world of long-term capital gains tax (LTCG), exploring what it is, how it is calculated, the tax rate, and the exemptions available to investors. Understanding LTCG tax can help investors make informed investment decisions and manage their tax liabilities.

What is Long Term Capital Gains Tax?

Long Term Capital Gains Tax is a tax levied on the profits earned from the sale or transfer of certain long-term assets, such as stocks, real estate, mutual funds, or other investments. The tax is applicable only when these assets are held for a specific period, typically more than one year, before they are sold.

Here are some key points about Long Term Capital Gains Tax on Mutual Funds:

  • Holding Period: To qualify for long-term capital gains treatment, an investor must hold the asset for a minimum period of one year or more in case of equity oriented funds and three years or more in case of other than equity oriented funds. If the asset is sold before this holding period, the gains are considered short-term and are subject to a different tax rate.
  • Tax Rates: Equity oriented schemes are subject to Long-term capital gains tax at the rate of 10%* and other than equity-oriented schemes are subject to LTCG at the rates are 20%*. * The rates mentioned above are exclusive of cess and surcharge if applicable.
  • Tax Benefits: Governments often provide lower tax rates on long-term gains to encourage long-term investment.
  • Reporting: Taxpayers are required to report their capital gains on their income tax returns, specifying whether the gains are short-term or long-term.

What Falls under Long-Term Capital Gains?

Long-term capital gains in terms of mutual funds typically refer to the profits made on the redemption or sale of mutual fund units held for a duration of more than one year. These gains are subject to taxation, with different rates applied to equity and non-equity mutual funds:

  1. Equity Mutual Funds: If you hold equity-oriented mutual funds for over one year, any gains on them are considered long-term capital gains. Such gains are taxed at 10% without the benefit of indexation.
  2. Debt Mutual Funds: For debt mutual funds, gains on units held for more than three years are categorised as long-term capital gains. These are taxed at 20% with the indexation benefit.

It's essential to stay updated with the prevailing tax regulations, as tax rates and rules may change over time.

Long-Term Capital Gains Tax Rates

The Long-Term Capital Gains Tax (LTCG) rates vary across different asset classes:

  • Equity Asset Classes: For gains from equity mutual funds, the LTCG tax rate is 10%, without indexation benefits. Profits up to Rs. 1,00,000, however, enjoy an exemption from taxation. Similarly, the sale of listed equity shares attracts a 10% tax on gains under LTCG provisions, with an exemption of up to Rs. 1,00,000. In contrast, gains from the sale of unlisted shares are taxed at a 20% LTCG rate after considering indexation benefits.
  • Debt Assets: For debt instruments such as bonds and mutual funds, the LTCG tax rate is 20%, factoring in indexation benefits.
  • Real Estate and Other Assets: LTCG from the sale of real estate assets, gold, and other metals is taxed at a rate of 20% with indexation. This uniform rate is applicable to these non-equity asset classes.

How to calculate LTCG Tax?

  • The calculation of LTCG tax depends on the type of asset and the applicable tax rate.
  • For equity-oriented assets like unit of equity-oriented mutual funds and shares of listed companies, the long-term capital gains tax rate is 10% on gains exceeding Rs. 1,00,000. Gains up to Rs. 1,00,000 are exempt from tax.
  • For non-equity assets like debt mutual funds, real estate properties, and gold, the LTCG tax is 20% after indexation. Indexation helps adjust the purchase price of the asset for inflation, reducing the taxable gains.

Difference Between Short-Term Capital and Long-Term Gains Tax

Aspect

Short-Term Capital Gains (STCG)

Long-Term Capital Gains (LTCG)

Equity Asset Class (except unlisted shares)

Applicable for up to one year holding period

Applicable when holding period exceeds one year

Rate of Taxation (Equity)

15%

10% without indexation benefits

Relief Provision (Equity)

N/A

No tax on gains up to Rs. 1,00,000

Debt Assets Class

STCG applies for up to 36 months (3 years)

LTCG applies for more than 36 months (3 years)

Rate of Taxation (Debt)

Based on investor's slab rates

20% with indexation benefits

Real Estate

STCG applies for up to 2 years

LTCG applies for more than 2 years

Rate of Taxation (Real Estate)

As per individual's tax slab rates

20% with indexation benefits

Gold and Other Metals

STCG applies for up to 3 years

LTCG applies for more than 3 years

Rate of Taxation (Gold and Other Metals)

Based on individual's tax slabs

20% with indexation benefits


What are the exemptions on Long-Term Capital Gains Tax?

  • There are certain exemptions available to investors on long-term capital gains under various sections of the Income Tax Act, 1961.
  • For example, Section 54 provides an exemption on LTCG tax if the gains from the sale of a residential house property are reinvested in another residential house property within the specified period.
  • Under Section 54EC, capital gains up to a maximum of Rs. 50 lakhs, made on the sale of a long-term asset, can be exempted if the proceeds are invested in certain specified bonds within 6 months.
  • Capital gains arising from the sale of equity shares or units of equity-oriented mutual funds on or after April 1, 2018, up to Rs. 1 lakh in a fiscal year is exempt from tax. Gains exceeding Rs. 1 lakh are taxed at a rate of 10%.

It is important to note that these exemptions have certain conditions and criteria that must be met to claim them.

How to save tax on Long-Term Capital Gains?

  • To save tax on long-term capital gains, investors can utilise various tax-saving investment instruments, like Equity Linked Savings Schemes (ELSS) or the National Pension System (NPS).
  • By investing in these tax-saving options, investors can claim deductions under Section 80C of the Income Tax Act and reduce their taxable income.

Long-term capital gains tax (LTCG) is an essential aspect of taxation for investors. Understanding the holding period of assets, the applicable tax rates, and the exemptions available can help investors optimise their tax liabilities and make informed investment decisions. By exploring various tax-saving options and staying updated with the latest tax regulations, investors can make the most of their long-term capital gains and work towards long-term wealth creation and financial goals.

As with any tax-related matters, seeking professional advice is advisable to ensure accurate tax planning and compliance with tax laws. Overall, being aware of the tax implications of investment decisions is a key element in sound financial planning.


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Frequently Asked Questions

Is there any long term capital gain tax if a person incurs a loss?

No, if a person incurs a loss, there won't be any long-term capital gains tax.

Do we get an exemption by investing in a property outside India with the LTCG?

Investment in a property outside India does not provide an exemption from LTCG tax.

Why do we take the indexed cost of acquisition in tax calculation?

Indexed cost of acquisition is used in tax calculation to adjust the purchase price for inflation, reducing the taxable gains.

What is the tax exemption limit for different persons?

Tax exemption limits for LTCG vary for different persons and asset types.

Will tax be applicable on losses incurred in LTCG transactions?

Tax is not applicable on losses incurred in LTCG transactions; losses can be set off.

What are the types of Capital Gains Tax?

There are two types of Capital Gains Tax: Long-Term Capital Gains Tax (LTCG) and Short-Term Capital Gains Tax (STCG).

What are Capital Assets?

Capital assets include real estate, stocks, bonds, and other valuable properties.

When to Pay Long Term Capital Gains Tax?

LTCG tax is paid when assets like property or stocks are held for an extended period and then sold at a profit.

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