Long Term Capital Gain Tax on Mutual Funds
5paisa Research Team
Last Updated: 08 May, 2025 03:00 PM IST
Content
- What is Long-Term Capital Gains (LTCG) Tax?
- Taxation Based on Mutual Fund Type and Holding Period
- How is LTCG Tax Calculated?
- Exemptions from LTCG Tax
- Impact of LTCG Tax on Your Investment Strategy
- Conclusion
Investing in mutual funds is one of the most effective ways to build long-term wealth, offering investors diversification, professional management, and potential capital appreciation. However, understanding the tax implications of mutual fund investments is equally important to ensure maximum returns. One key aspect of mutual fund taxation is the Long-Term Capital Gains (LTCG) tax, which applies when an investor sells mutual fund units after holding them for a specific duration.
Recent changes in tax laws have revised LTCG tax rates, impacting how gains on mutual funds are taxed. Equity mutual funds now attract a 12.5% LTCG tax on gains exceeding ₹1.25 lakh, while debt mutual funds are taxed at the investor’s income tax slab rate without indexation benefits. These updates significantly influence investment strategies, making it crucial for investors to plan their investments efficiently and tax-effectively.
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Frequently Asked Questions
Yes, ELSS offers higher return potential and a shorter lock-in of 3 years, compared to PPF’s 15 years. However, ELSS carries market risk, while PPF offers fixed, risk-free returns backed by the government.
Short-term capital gains tax applies to gains made from selling mutual funds within a specific holding period, while long-term capital gains tax applies to gains from investments held for longer durations.
After 3 years, profits from ELSS are treated as long-term capital gains. Gains up to ₹1.25 lakh in a financial year are tax-free. Gains exceeding this limit are taxed at a flat rate of 12.5%.
Indexation adjusts the purchase cost of debt funds for inflation, reducing taxable capital gains and thereby lowering the LTCG tax burden, especially for long-term investors holding the fund for over three years. However, it is important to note that indexation benefits are no longer available on debt funds.
No, ELSS is not taxed every year. Tax is applicable only when you redeem your units. Until redemption, your investment grows without any annual tax deductions on the gains, allowing compounding to work more effectively.
LTCG tax is applicable to both equity and debt mutual funds but differs in tax rates and exemptions based on the type of fund and the holding period.
You can legally avoid LTCG tax on ELSS by ensuring that your annual long-term capital gains from all equity investments remain within ₹1.25 lakh. Anything above that is taxed at 12.5%, without indexation.
If you sell mutual funds and switch to another fund, the sale triggers LTCG tax. Holding the investment for longer periods helps reduce the tax liability due to the preferential tax rates on long-term investments.
If your LTCG surpasses ₹1 lakh in a financial year, the amount exceeding this limit will be taxed at 12.5% for equity funds, while debt fund gains will be taxed as per your applicable tax slab.