Understanding LTCG tax is essential for maximizing post-tax returns. Union Budget 2024 brought significant changes effective July 23, 2024. This guide explains current tax rates, calculations, and planning strategies.
What is Long-Term Capital Gains?
Long-term capital gains represent profit from selling a capital asset after holding it beyond a specified minimum period. For mutual funds, whether gains qualify as long-term depends on fund type and holding duration.
Formula: Capital Gain = Sale Value (Redemption NAV × Units) – Purchase Cost (Purchase NAV × Units) – Expenses
If held beyond the minimum period, it’s LTCG; otherwise, it’s short-term capital gains (STCG), taxed differently.
Holding Period Requirements
Equity-Oriented Funds (65%+ equity)
– LTCG: Holding period more than 12 months
– STCG: Holding period 12 months or less
Includes equity funds, ELSS, hybrid equity funds, equity index funds.
Debt-Oriented Funds
Taxation rules changed fundamentally from April 1, 2023:
– Investments on/after April 1, 2023: All gains taxed at income tax slab rate (any holding period)
– Investments before April 1, 2023: Rules vary by sale date (see table below)
Includes debt funds, liquid funds, gilt funds, banking & PSU funds.
Current LTCG Tax Rates (Post-Budget 2024)
Equity Funds (Holding > 12 months)
Tax Rate: 12.5% (no indexation)
Annual Exemption: ₹1.25 lakh per financial year (cumulative across all equity funds, shares, and equity instruments)
Budget 2024 Changes
| Category | Previous | Current |
|---|---|---|
| Tax Rate | 10% | 12.5% |
| Exemption Limit | ₹1 lakh | ₹1.25 lakh |
Debt Funds – Timeline Table
| Investment Date | Sale Date | Holding Period | Tax Treatment |
|---|---|---|---|
| On/after Apr 1, 2023 | Any date | Any period | Income tax slab rate |
| Before Apr 1, 2023 | On/after July 23, 2024 | > 24 months | 12.5% (no indexation) |
| Before Apr 1, 2023 | On/after July 23, 2024 | ≤ 24 months | Income tax slab rate |
| Before Apr 1, 2023 | Before July 23, 2024 | > 36 months | 20% (with indexation) |
| Before Apr 1, 2023 | Before July 23, 2024 | ≤ 36 months | Income tax slab rate |
Understanding Indexation (Now Removed)
Indexation adjusted purchase cost for inflation using the Cost Inflation Index (CII), reducing taxable gains.
Example of how it worked:
– Investment in 2020: ₹1,00,000 (CII: 301)
– Redemption in 2024: ₹1,40,000 (CII: 363)
– Without indexation: Gain = ₹40,000
– With indexation: Indexed cost = ₹1,00,000 × (363/301) = ₹1,20,598
– Taxable gain = ₹1,40,000 – ₹1,20,598 = ₹19,402
– Tax saved: (₹40,000 – ₹19,402) × 20% = ₹4,120
Budget 2024 removed indexation for most assets sold after July 23, 2024.
Calculating LTCG Tax: Examples
Example 1: Equity Fund – No Tax (Below Exemption)
Investment: ₹2,00,000 in January 2023
Redemption: ₹2,50,000 in March 2025 (26 months holding)
Step 1: Calculate gain
Gain = ₹2,50,000 – ₹2,00,000 = ₹50,000
Step 2: Check holding period
26 months > 12 months = LTCG ✓
Step 3: Apply exemption
₹50,000 < ₹1.25 lakh exemption
Tax payable: ₹0
Example 2: Equity Fund – With Tax (Above Exemption)
Investment: ₹5,00,000 in June 2022
Redemption: ₹7,00,000 in September 2024 (27 months)
Gain: ₹2,00,000
Calculation:
– Exempt amount: ₹1,25,000
– Taxable gain: ₹2,00,000 – ₹1,25,000 = ₹75,000
– Tax: ₹75,000 × 12.5% = ₹9,375
(Plus 4% cess = ₹9,750 total)
SIP Investments: Separate Taxation
Each SIP installment is treated as a separate investment with its own holding period.
Example:
SIP: ₹10,000 monthly starting January 2023
Full redemption: March 2025
Tax treatment:
– January 2023 SIP: Held 26 months = LTCG
– February 2023 SIP: Held 25 months = LTCG
– March 2024 SIP: Held 12 months = STCG (exactly 12 months qualifies as short-term)
– April 2024 onwards: All STCG
Result: Mixed LTCG and STCG. Fund house provides detailed breakup for tax filing.
Planning tip: Redeem after all installments cross 12 months to maximize LTCG benefits.
Tax-Saving Opportunities
ELSS (Equity Linked Savings Scheme)
– Benefit: Section 80C deduction up to ₹1.5 lakh on investment (old tax regime only)
– Lock-in: 3 years mandatory
– LTCG on redemption: Taxed like regular equity funds (12.5% above ₹1.25 lakh)
Important: ELSS provides tax deduction on investment, not exemption on gains.
Section 54EC (Capital Gains Bonds)
– Invest LTCG in specified bonds (NHAI/REC) up to ₹50 lakh within 6 months
– Entire invested LTCG gets tax exemption
– Lock-in: 5 years, Returns: ~5-5.5%
Works only for large gains where you can lock money for 5 years.
Filing Requirements
ITR Form: ITR-2 (ITR-1 doesn’t allow capital gains)
Schedule: Schedule CG (Capital Gains)
Requirements:
– Transaction statements from fund house/platform
– Purchase and redemption dates with NAV
– Calculate STCG and LTCG separately
– Report all gains (even below exemption)
Record keeping: Maintain statements for at least 6 years.
Budget 2024 Changes Summary
Budget 2024 – Equity & Debt Tax Changes
| Aspect | Before (till July 22, 2024) | After (from July 23, 2024) |
|---|---|---|
| Equity LTCG Rate | 10% | 12.5% |
| Equity Exemption | ₹1 lakh/year | ₹1.25 lakh/year |
| Indexation | Available (debt pre-Apr 2023) | Removed |
| Debt Holding Period | 36 months | 24 months (pre-Apr 2023 only) |
Net impact: Higher exemption offsets rate increase for moderate gains (₹1-1.5 lakh). Larger gains pay slightly more tax.
Smart Redemption Planning
1. Wait for LTCG Qualification
If near the 12-month mark, wait to qualify for 12.5% LTCG instead of 20% STCG.
2. Spread Across Financial Years
₹3 lakh gains? Redeem ₹1.25 lakh in FY 2024-25, ₹1.75 lakh in FY 2025-26. Saves ₹15,625 in taxes.
3. Use Family Exemptions
Each family member gets separate ₹1.25 lakh exemption. Consider investments in spouse/children’s names (with their PAN/KYC).
4. Offset with Losses
Losses in other equity investments can offset LTCG from mutual funds, reducing taxable gains.
5. Track Total Portfolio
Monitor cumulative gains across all equity investments (funds + stocks) to plan within exemption limits.
Key Takeaways
✓ Equity funds: Hold >12 months, pay 12.5% tax on gains above ₹1.25 lakh annual exemption
✓ Debt funds: Investments after April 1, 2023 taxed at slab rate regardless of holding period
✓ Indexation removed: For most assets sold after July 23, 2024
✓ SIPs: Each installment taxed separately based on its holding period
✓ ELSS: Provides investment deduction (Section 80C), not gains exemption
✓ Annual exemption: ₹1.25 lakh is cumulative across all equity investments per financial year
✓ Tax planning: Strategic redemption timing can save significant taxes
Conclusion
While tax efficiency matters, prioritize financial goals, risk tolerance, and investment horizon first. Tax considerations should inform redemption timing, not whether you invest.
Stay updated on tax law changes, maintain proper records, and consult qualified tax professionals for complex situations involving multiple transactions or large gains.
Curie Money (AMFI ARN: 257706) partners with ICICI Prudential and Bajaj Finserv for transparent investment solutions. For specific tax guidance, always consult a qualified chartered accountant or tax consultant.
Disclaimer:
Mutual fund investments are subject to market risks. Read all scheme-related documents carefully. This information is for educational purposes only, not tax advice. Tax laws are subject to change and individual circumstances vary. Always consult a qualified tax professional for personalized guidance.
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