How to Calculate Capital Gain Tax on Mutual Funds

Finance Act 2018 had introduced Long Term Capital Gain Tax on sale of Equity shares or units of Equity oriented Mutual Funds u/s 112A w.e.f 01.04.2018. This proposal has deleted the exemptions available u/s 10(38) of the Income Tax Act 1961 on LTCG arising out of the sale of Equity shares or units of equity Mutual Funds. This exemption u/s 10(38) was effective from F.Y 2005-06 to F.Y 2017-18. So before the Finance Act, 2018 long term capital gains were completely tax free.

Section 112A of the Income Tax Act introduced Long Term Capital Gain Tax on Mutual Funds @10% if the capital gains exceed Rs 1 Lakh per annum. In this blog post, we will learn how to calculate both STCG and LTCG Tax on mutual funds.

1. Tax on Mutual Funds⇒Is mutual fund income taxable?

Income from mutual funds is of two types such as short term/ long term capital gains and dividend from equity mutual fund scheme. Therefore, income tax on mutual funds is applicable both for short term capital gains and long-term capital gains. STCG is taxed@15% and there is no change for short term capital gains in the Finance Act 2018. Section 112A of the I.T Act is applicable only for LTCG which is taxed @10% without indexation benefit if your capital gains from the redemption of units of equity mutual fund exceed Rs. 1 Lakh in a financial year. Now, let’s see how to calculate tax on mutual funds in India or income tax on mutual funds redemption.

⇒Income Tax on Mutual Funds at a glance

Short Term Capital Gains or STCG for equity or Balanced or Hybrid funds are taxed @15%;
Long Term Capital Gains or LTCG for equity or Balanced or Hybrid funds are taxed @10% if the gains exceed Rs.1 Lakh in a financial year;
Short Term Capital Gains or STCG for Debt Mutual funds are taxed only as per the existing income tax slab;
Long Term Capital Gains or LTCG for Debt Mutual funds are Taxable @20% with Indexation benefit.

So from the above, you can see that taxability of mutual funds on equity schemes and debt funds are totally different. One notable difference is that there is no indexation benefit for gains arising from equity mutual funds. Further, there is no applicable fixed rate for tax on debt mutual funds unlike the tax on equity mutual funds. STCG on Debt mutual funds are taxed as per your existing income tax slab.

2. Tax on Mutual Funds⇒How is capital gains calculated on Equity mutual funds?

Before going to an example you must keep in mind that Tax on mutual funds is determined based on holding period and types of mutual funds scheme. Short Term Capital Gain on equity oriented mutual funds is taxable @15% and not exempted at all.

Also Section 112A of the I.T Act has declared 31.01.2018 as the Grandfathered date. This means any long term capital gains arising on sale of equity mutual funds or stocks as up to 31.01.2018 is to be grandfathered(exempted).

Therefore, LTCG if any arises up to 31.01.2018 , it should not be considered or in other words is exempted. However any LTCG arising thereafter is taxable subject to exceeding Rs. 1 Lakh per annum.

Section 112A of the I.T Act has introduced a method for determining the cost of acquisition(C.O.A) the higher of the following two:

Cost of Acquisition(C.O.A):- Higher of the two

1. Actual cost of investments and

2. Lower of the

a. Fair Market Value on Grandfathered date i.e. 31.01.2018

b. Sale price on later date

So Capital Gain/ Loss = Sale Value-Revised cost of investment on 31.01.2018.

Is this looking very confusing? Don’t worry I will clear the doubts in the below example. Now let’s take an example for easy understanding.

Example 1- Mr. Ram Kumar purchased 10000 units of Equity mutual funds @Rs.10 per unit on 27.06.2017. He sold 8000 units on 15.09.2018 @Rs.25 i.e. for Rs.2 Lakh. NAV of this mutual fund scheme on 31.01.2018 i.e. on Grandfathered date was Rs.22 per unit. Now calculate how much tax on mutual funds redemption Mr. Kumar has to pay.

⇒Calculation of Tax on Mutual Funds( Only 8000 units were sold out of 10000 units)

Date of purchase – 27.06.2017

Date of Sale – 15.09.2018(8000 units only)

Holding period – More than 12 months

Types of Capital Gains – Mr. Kumar did invest in equity mutual fund – So it is Long Term Capital Gain

Purchase price as on 27.06.2017 – Rs.10 per unit

Investment value for 10000 unit – Rs. 80,000(8000X Rs.10)

NAV on Grandfathered date of 31.01.2018 – Rs.22 per unit

Capital Gains as on 31.01.2018 – Rs.96,000 i.e. (Rs.22-10)X8000 units

So, LTCG on Grandfathered date is Rs.96000. But it should not be considered for payment of tax.

The actual cost of investments on 27.06.2017 is Rs. 80000(We have to consider 8000 units only)

The revised cost of investments on Grandfathered date on 31.01.2018 is higher of the two

1.Rs. 80000 and

2.lower of the below two

a. Fair Market Value on 31.01.2018 is Rs.1,76,000 (This is lower than the sale value of 200000)

b. Sale value on 15.09.2018 is Rs.2,00,000

So, the revised cost of investment is Rs. 1,76,000( Higher of 80000 and 176000)

Now, applying the formula Capital Gain/ Loss = Sale Value-Revised cost of investment on 31.01.2018

The Capital Gains comes to Rs.24000(200000-176000).

Since long term capital gain does not exceed Rs.1 Lakh, Mr. Kumar is not required to pay any tax on mutual funds redemption.

In simple terms, any gains as on 31.01.2018 are exempted and additional gains from 01.02.2018 to date of sale would be treated as Long Term Capital Gains.

Example 2- Now if the sale value NAV was Rs.40 what would have been the scenario? How much tax he would have to pay?

In that case the revised cost of investments would be Rs. 176000 and Sale value would be R. 320000.

So LTCG will be Rs.1,44,000(320000-176000). Mr. Kumar has to pay long term capital gains tax on Rs.44000 only after deducting Rs.100000 exemption. So his tax liability would be 4,400 i.e. 44000X10%.

3. Tax on Mutual Funds⇒How is capital gains calculated on Debt mutual funds?

Short term capital gains arising on Debt mutual funds will be taxed as per the existing income tax slab of the investor. This means the STCG will be added with his present income from any other sources and will be taxable accordingly. No specific tax rate for STCG on Debt mutual funds.

On the other hand, the long term capital gains arising on Debt mutual funds will be taxed @20% with indexation benefit. This means the cost of investment or acquisition will have to be revised in line with cost of index figure. This will substantially enhance the cost of investments in current year and would lead to decreasing the capital gains.

4. Tax on Mutual Funds⇒How is Dividend received on Debt mutual funds is taxed?

The mutual fund investors are not required to pay any tax on dividend received from the fund house. Rather the fund house itself shall pay the dividend distribution tax by deducting from the NAV of the scheme. So, dividend received both from the equity and debt funds are tax free in the hands of the investors.

Currently, the tax rate on dividend received from equity mutual funds is 11.648% to keep pace with the tax rate of LTCG @10%.

But the Dividend Distribution Tax for non equity mutual funds such as Debt funds, Liquid funds are subjected to an effective tax rate of 29% i.e. 25% plus Surcharge 12% and Health and Education Cess @4% from 01.04.2019.The Cess was 3% in 2018.So the effective tax rate in 2018 was 28.84%.

How to Calculate Tax on Mutual Funds-Easy Solution

How to Calculate Capital Gain Tax on Mutual Funds

1. Tax on Mutual Funds⇒Is mutual fund income taxable?

⇒Income Tax on Mutual Funds at a glance

3. Tax on Mutual Funds⇒How is capital gains calculated on Debt mutual funds?

4. Tax on Mutual Funds⇒How is Dividend received on Debt mutual funds is taxed?

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ArthikDisha

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How to Calculate Capital Gain Tax on Mutual Funds

1. Tax on Mutual Funds⇒Is mutual fund income taxable?

⇒Income Tax on Mutual Funds at a glance

2. Tax on Mutual Funds⇒How is capital gains calculated on Equity mutual funds?

5. Tax on Mutual Funds⇒Is mutual fund tax exempted?

Final words on Tax on Mutual Funds

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ArthikDisha

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