Long Term Capital Gain Tax On Mutual Funds: What Is Long Term Capital Gain Tax 2023?

Long Term Capital Gain Tax on Mutual Funds: What is Long Term Capital Gain Tax 2023?

Understanding Long Term Capital Gain Tax on Mutual Funds

Learn about the Long Term Capital Gain Tax on Mutual Funds and how it affects your investments. This article covers the basics of LTCG tax, its calculation, and its impact on your returns.

Introduction

Investing in mutual funds is a great way to grow your wealth over the long term. However, as with any investment, you need to be aware of the taxes that you may have to pay on your gains. One such tax is the Long Term Capital Gain (LTCG) Tax. This tax is applicable on the gains made from the sale of mutual funds held for more than one year. In this article, we will take a closer look at the Long Term Capital Gain Tax on Mutual Funds and understand how it works.

What is Long Term Capital Gain Tax?

Long Term Capital Gain Tax (LTCG) is a tax levied on the profit or gains made from the sale of an asset held for a period of more than one year. The gains made from the sale of mutual funds held for more than one year are subject to LTCG tax. The LTCG tax rate for mutual funds is 10% on the gains above Rs. 1 lakh.

How is LTCG tax calculated on Mutual Funds?

The calculation of LTCG tax on mutual funds is straightforward. Let us assume that you bought mutual fund units for Rs. 10,000 in January 2020 and sold them for Rs. 15,000 in February 2022. In this case, the LTCG tax will be applicable on the gains made between January 2021 and February 2022, which is Rs. 5,000.

The cost of acquisition of mutual fund units in this case is Rs. 10,000. To calculate the LTCG tax, we need to calculate the fair market value (FMV) of the mutual fund units as on 31st January 2018, which is Rs. 12,000. The LTCG tax will be applicable on the gains above Rs. 12,000. In this case, the gains above Rs. 12,000 are Rs. 3,000. Therefore, the LTCG tax payable on this transaction will be Rs. 300 (10% of Rs. 3,000).

Impact of LTCG tax on Mutual Fund returns

LTCG tax has a significant impact on the returns from mutual funds. Since LTCG tax is applicable on the gains made above Rs. 1 lakh, it reduces the overall returns from mutual funds. Let us understand this with the help of an example.

Assume that you invested Rs. 1 lakh in a mutual fund in January 2020 and redeemed it in January 2023. Let us assume that the returns from the mutual fund were 15% per annum. The value of your investment would be Rs. 1,52,087 at the time of redemption.

However, since the gains made from the sale of mutual funds held for more than one year are subject to LTCG tax, you will have to pay 10% tax on the gains above Rs. 1 lakh. In this case, the gains above Rs. 1 lakh are Rs. 52,087. Therefore, the LTCG tax payable on this transaction will be Rs. 5,209 (10% of Rs. 52,087).

After deducting the LTCG tax, the actual returns from the mutual fund would be Rs. 1,46,878. Thus, the LTCG tax has reduced the returns from the mutual fund by Rs. 5,209.

How to minimize LTCG tax on Mutual Funds?

There are a few ways in which you can minimize the LTCG tax on mutual