If an investor wants to create a large corpus over the long term, mutual funds can be a good option for them. However, there is an income tax liability on the profit earned through the sale of mutual funds. For equity-oriented mutual funds, the holding period is important. The tax amount would be different and depend on the period you hold your investments.
If the units are held for more than 12 months, they are generally treated as long-term capital assets.
For eligible transfers, LTCG exceeding Rs 1.25 lakh in a financial year is currently taxable at 12.5 per cent under Section 112A. The Rs 1.25 lakh limit applies to the aggregate eligible LTCG for the year and not separately to every mutual fund or every transaction.
This means the first Rs 1.25 lakh of eligible LTCG during the financial year does not attract tax under Section 112A. Tax is calculated only on the amount above this limit.
Suppose you invested in equity mutual funds several years ago and now sell some of your units at a profit of Rs 2 lakh. Will you have to pay 12.5 per cent tax on the entire Rs 2 lakh?
If you have no other eligible LTCG during the year and the entire Rs 1.25 lakh limit is available, tax will be charged only on Rs 75,000. Let’s understand the calculation step by step.
Rs 2 lakh LTCG: How much is taxable?
Assume an investor makes a total long-term capital gain of Rs 2 lakh from equity mutual funds during the financial year.
LTCG threshold under Section 112A: Rs 1,25,000
Taxable LTCG: Rs 2,00,000 – Rs 1,25,000
Taxable amount: Rs 75,000
Therefore, tax is not calculated on the entire Rs 2 lakh profit. Only Rs 75,000 falls above the Rs 1.25 lakh limit.
How much LTCG tax will you pay?
The applicable LTCG tax rate is 12.5 per cent.
Tax on Rs 75,000 at 12.5 per cent:
Rs 75,000 × 12.5% = Rs 9,375
So, the basic LTCG tax comes to Rs 9,375, as per the calculations.
A health and education cess of 4 per cent is also generally added to the income-tax amount.
Total tax: Rs 9,375 + Rs 375 = Rs 9,750
Net gain after this tax: Rs 1,90,250
This calculation assumes that the investor has already used the normal basic exemption limit against other income and that there are no capital losses, surcharge or other factors affecting the final tax liability.
What if your LTCG is Rs 1.25 lakh or less?
Suppose your total eligible long-term capital gains from equity mutual funds and other investments covered under Section 112A are Rs 1 lakh during the financial year.
In that case, there would generally be no Section 112A LTCG tax because the gain is within the Rs 1.25 lakh limit.
The same would apply if your total eligible LTCG is exactly Rs 1.25 lakh.
It is only the amount above Rs 1.25 lakh that becomes taxable at the applicable 12.5 per cent rate.
What if your LTCG is Rs 1.50 lakh?
Consider another example.
Less Rs 1.25 lakh threshold: Rs 1,25,000
Tax at 12.5 per cent: Rs 3,125
Cess at 4 per cent: Rs 125
So, even though the investor has earned Rs 1.50 lakh in long-term gains, tax is calculated only on Rs 25,000.
What if your LTCG is Rs 2.50 lakh?
If total eligible LTCG is Rs 2.50 lakh:
Less Rs 1.25 lakh threshold: Rs 1,25,000
Taxable amount: Rs 1,25,000
Tax at 12.5 per cent: Rs 15,625
Cess at 4 per cent: Rs 625
The examples show how the tax amount increases only as the gain above the Rs 1.25 lakh limit rises.
Rs 1.25 lakh limit is not available separately for every fund. This is one point investors should understand clearly.
Suppose you make an LTCG of Rs 80,000 from one equity mutual fund and another Rs 70,000 from a second eligible equity fund during the same financial year.
Your combined LTCG is Rs 1.50 lakh.
You cannot claim a separate Rs 1.25 lakh limit for each fund. The eligible gains covered by Section 112A are considered together for the financial year.