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Long Term Capital Gain on Mutual Funds – LTCG Tax on Mutual Funds 2022

We all invest in mutual funds to profit from them. However, when we profit from our mutual funds and other investments, we must pay tax. Depending on the period for which we held the investment, the tax applicable can be short-term or long-term capital gain tax. This article will focus on long term capital gain […]
Long Term Capital Gain on MF

We all invest in mutual funds to profit from them. However, when we profit from our mutual funds and other investments, we must pay tax. Depending on the period for which we held the investment, the tax applicable can be short-term or long-term capital gain tax. This article will focus on long term capital gain on mutual funds.

Capital gains on mutual funds

An investor can earn income from mutual funds either in the form of regular dividends or capital gains. Dividends are declared from the profit booked by the fund manager. Capital gains involve the redemption of mutual fund units.

The difference between the price at which you bought the mutual fund units, and the price at which you sold them, is known as a capital gain. In simple terms, capital gains are the profit or loss on the mutual fund investment. If an investor sells the mutual fund units for a higher price than they were bought, the difference is known as a capital gain or profit.

If an investor sells the mutual fund units for a lower price than they were bought, the difference is known as a capital loss or simply loss.

Long term capital gain on mutual fund

The long term capital gain differs for equity funds and other funds. From a taxation point of view, any mutual fund scheme that invests a minimum of 65% of its assets in equity and equity-related instruments at all times is known as an equity mutual fund. Also, any mutual fund scheme that is not an equity scheme is taxed as a non-equity scheme.

Long-term capital gain on equity funds

  • If you sell your equity mutual fund units after a holding period of 12 months, the capital gain is known as a long-term capital gain. The first Rs. 1 lakh long-term capital gain in a financial year is exempt from taxation. Any incremental long-term capital gain is taxed at 10% without indexation benefit.

Long-term capital gain on non-equity funds

  • If you sell your non-equity mutual fund units after a holding period of 36 months, the capital gain is known as a long-term capital gain. The long-term capital gain is taxed at 20% with indexation benefit and at 10% without indexation benefit.
  • For example, Kamlesh invested Rs. 2 lakhs in equity mutual funds during the April 2020 stock market crash. By December 2021, his investment more than doubled to Rs. 4.2 lakhs. He redeemed his investment and made a long-term capital gain of Rs. 2.2 lakhs. In this case, the first Rs. 1 lakh will be exempt. The 10% long-term capital gains tax will be levied on the remaining  Rs. 1.2 lakhs. So, in this case, Kamlesh will have to pay a long-term capital gains tax of Rs. 12,000 (10% on Rs. 1.2 lakhs).

Hybrid mutual funds invest in equity and debt instruments. Depending on the equity proportion (minimum 65% and above at all times), hybrid mutual funds schemes are classified as equity schemes or non-equity schemes for taxation purposes.

Long-term capital gains on systematic investment plan (SIP)

If you have started a systematic investment plan (SIP), then the holding period clause will apply to every SIP instalment. So, in an equity fund SIP, every instalment will have to be held for more than 12 months for the profits to be classified as long-term capital gains. 

For example, Rajesh started a monthly SIP of Rs. 2,000 in a Nifty 50 Index Fund in January 2022. In this case, the profit on the January 2022 instalment will be classified as long-term capital gain if it is sold after one year (i.e., January 2023). Similarly, the profit on the February 2022 instalment will be classified as long-term capital gain if it is sold after one year (i.e., February 2023).

Similarly, in a non-equity fund SIP, every instalment will have to be held for more than 36 months for the profits to be classified as long-term capital gains. For example, Kavita started a monthly SIP of Rs. 3,000 in a liquid fund in March 2022. In this case, the profit on the March 2022 instalment will be classified as long-term capital gain if it is sold after three years (i.e., March 2025). Similarly, the profit on the April 2022 instalment will be classified as long-term capital gain if it is sold after three years (i.e., April 2025).

Tax harvesting to reduce or nullify long-term capital gain

As an investor, you should always invest for the long term to achieve your financial goals. When you invest for the long term, the magic of compounding works in your favour and creates wealth. You can use the concept of tax harvesting to reduce or nullify your long-term capital gains tax. You can use tax harvesting in such a manner that your long-term capital gain in a financial year is Rs. 1 lakh or less. When your long-term capital gain in a financial year is less than Rs. 1 lakh, it is exempt from taxation.


To start investing in mutual funds as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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