Investing in mutual funds has become one of the most popular ways of potential wealth accumulation in India. Despite the growing popularity of mutual funds, many investors are still unaware that capital gains on mutual funds are taxable. The Income Tax Act of 1961 highlights the specific provisions that govern how capital gain tax is applicable on mutual fund investments.
So, if you are planning to start investing in mutual funds, you must understand both the short-term capital gains tax and long-term capital gains tax on mutual funds. Understanding the tax regulations is essential, especially because the amount of capital gains tax payable impacts your net returns.
Once you know how capital gains are calculated and taxed, you can plan your investments and redemptions to minimise tax outgo. This guide will walk you through the concepts of short-term and long-term capital gains, when each is applicable, and their corresponding tax rates in detail.
Table of Content
What is Capital Gains Tax in Mutual Funds?
Capital gains tax is the tax you pay when you sell mutual fund units for more than what you originally invested. In mutual funds, the buying price and the selling price are determined by the Net Asset Value (NAV) on the purchase date and the redemption date, respectively.
Your capital gain is simply the difference between the total value at the time of sale (NAV on redemption date × number of units sold) and the total value at the time of purchase (NAV on purchase date × number of units bought).
Two factors decide the capital gain tax treatment of your mutual funds:
- Type of mutual fund – Equity-oriented, debt-oriented, or hybrid
- Holding period – The length of time between buying and selling
For a quick estimate of your liability before redeeming, you can use the capital gains calculator to see the tax impact based on your fund type, investment date, and redemption value.
Holding Period: Short Term vs. Long Term Capital Gains in Mutual Funds
As mentioned earlier, the tax rate on your mutual fund capital gain depends on whether it is classified as short-term or long-term. The table below outlines the holding period rules that determine how your gains are taxed for different types of mutual funds:
| Fund Type | Short-term Capital Gain | Long-term Capital Gain |
| Equity funds | Holding period less than 12 months | Holding period of 12 months or more |
| Debt funds | Always short-term for investments made after 1 April 2023 | Only applicable for investments before 1 April 2023 held beyond 24 months |
| Hybrid equity-oriented funds | Holding period less than 12 months | Holding period of 12 months or more |
| Hybrid debt-oriented funds | Always short-term for investments made after 1 April 2023 | Only applicable for investments before 1 April 2023 held beyond 24 months |
Short-term and Long-term Capital Gain Tax Rates Applicable on Mutual Funds
The Union Budget 2024 introduced notable changes to mutual fund tax rules, especially for equity-oriented schemes and certain non-equity funds. The following table sums up the current STCG and LTCG tax on mutual funds:
| Mutual Fund Category | STCG Before Budget 2024 | STCG After Budget 2024 | LTCG Before Budget 2024 | LTCG After Budget 2024 |
| Equity funds, equity-oriented hybrid funds, and equity ETFs | 15% if units are held for less than 1 year | 20% if units are held for less than 1 year | 10% tax on gains above ₹1 lakh per financial year | 12.5% tax on gains above ₹1.25 lakh per financial year |
| Debt funds, debt ETFs, and debt-oriented hybrid funds* (Purchased after April 1, 2023) | Taxed at slab rate | Taxed at slab rate | Taxed at slab rate | Taxed at slab rate |
| Fund of funds with less than 65% in debt, international/gold funds** | Taxed at slab rate | Taxed at slab rate if held for less than 24 months | Taxed at slab rate | 12.5% tax if held for over 24 months |
* For investments made before 1 April 2023, a 12.5% LTCG applies if sold after 24 months.
** Applicable from 1 April 2025; redemptions before this date will be taxed at slab rates.
If you want to estimate your liability under these rules, using a capital gains calculator or a mutual fund tax calculator can help you compare scenarios. You can run possible redemption scenarios on the tool to estimate the short-term capital gains tax on mutual funds from the equity bucket if you sell them before 12 months. You can then compare the LTCG on your mutual fund investment if you wait to sell post the 1-year mark.
How to Calculate Capital Gains Tax on Mutual Funds?
Here’s how you can calculate capital gains tax on your mutual fund investments:
- Determining the cost of purchase (NAV at purchase × units bought, plus applicable charges)
- Determining the sale value (NAV at sale × units sold, less exit load if any)
- Subtracting the purchase cost from the sale value to get the capital gain
- Applying the tax rate based on holding period and fund type
Instead of spending hours manually calculating these values, you can use a capital gains calculator. Just like an SIP calculator helps you calculate how your monthly SIP investments can grow over a selected tenure and assumed rate of return, a capital gains calculator helps you estimate the STCG and LTCG on mutual funds. Using this free online tool helps you save time and reduce errors.
Note: If you invest through SIPs, each instalment is treated as a separate purchase, and the holding period is counted from the purchase date of each instalment. This means in a single redemption, some units may attract STCG and others LTCG.
Examples of Short-Term and Long-Term Capital Gains Tax Calculation
Let’s take an example to see how short-term capital gains and long-term capital gains are calculated:
- Short-term example:
Suppose you invest ₹1,00,000 in an equity fund on 1st April 2024 and redeem it on 1st January 2025 for ₹1,15,000. The profit of ₹15,000, earned over a 9-month holding period, is a short-term capital gain. At 20% tax, you pay a short-term capital gains tax of ₹3,000 plus cess and surcharge.
- Long-term example:
Let’s say you invest ₹2,00,000 in an equity fund on 1st April 2024 and redeem it on 10th May 2025 for ₹2,40,000. The profit of ₹40,000, earned over 13 months, is a long-term capital gain. Since the total LTCG for the year is below the ₹1.25 lakh exemption limit, no tax is payable.
How to Save on Mutual Fund Tax Outflows?
If you are looking to save on mutual fund tax outflows, you may consider investing in Equity-Linked Savings Schemes or ELSS funds. These equity-oriented funds reduce your taxable income under Section 80C, offering deductions only under the old tax regime of up to ₹1.5 lakh per year on the invested amount. But these tax-saving MFs come with a 3-year lock-in period, so you must be ready to handle any immediate liquidity concerns.
That said, capital gains made from ELSS funds will be taxed like other equity mutual funds. This means if your gains exceed ₹1.25 lakh, you will have to pay LTCG tax at 12.5%. There are no short-term capital gain tax provisions for ELSS funds, since these funds come with a lock-in window that makes short-term redemption impossible.
Practical Tips to Manage Capital Gains and Mutual Fund Taxes
- Time your redemptions: Where possible, cross into the long-term holding period to benefit from lower tax rates.
- Track SIP instalments: Avoid redeeming recent purchases that would attract STCG unnecessarily.
- Use planning tools: The capital gains calculator and SIP calculator can help you forecast post-tax returns.
- Consider fund switches: Instead of redeeming completely, switch between funds within the same AMC to maintain market exposure while adjusting your portfolio.
Conclusion
Understanding short-term capital gains tax and long-term capital gain tax on mutual fund investments is as important as choosing the right scheme. The type of mutual fund, your holding period, and recent tax rule changes all influence how much tax you pay.
Just like a SIP past performance calculator can help you review the historical performance of funds when making investments, a mutual fund capital gains calculator can show the potential tax impact of redeeming your units. You can make use of these tools and calculators to better plan your investments and timing redemptions. This way, you can manage your tax liability effectively while staying aligned with your long-term goals.
Disclaimer:
- An Investor Education and Awareness Initiative by Tata Mutual Fund.
- To know more about KYC documentation requirements and procedure for change of address, phone number, bank details, etc., please visit: https://www.tatamutualfund.com/deshkarenivesh
- Please deal only with registered Mutual Funds, details of which can be verified on the SEBI website under ‘Intermediaries / Market infrastructure institutions.
- All complaints regarding Tata Mutual Fund may be directed to service@tataamc.com and/or https://scores.sebi.gov.in/ (SEBI SCORES portal) and/or https://smartodr.in/login
- Nomination is advisable for all folios opened by an individual, especially with sole holding, as it facilitates an easy transmission process.
This communication is a part of the investor education and awareness initiative of Tata Mutual Fund.
*Mutual Fund Investments are subject to market risks, please read all scheme related documents carefully.
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