Capital Gains Tax

When is an assessee liable to pay Capital Gains tax

16 Jan 2020
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Any profit or gain made from a financial transaction of a capital asset is considered as income and requires the assessee to pay capital gains tax for the financial year when the transfer takes place. Capital gains tax can be long-term or short-term, depending on the duration for which the individual holds the asset. These assets can be various forms of properties: movable or immovable, fixed or circulating, and tangible or intangible.

Capital assets are further divided into financial assets and non-financial assets. Stocks and mutual funds are examples of financial assets; these are intangible and represent the monetary value of physical items. For investors, mutual funds are popular investment tools for capital appreciation. Depending on the investment strategy, these can be conservative, aggressive, balanced or growth-oriented. Furthermore, through mutual funds, investors can diversify across various investments by just buying a single fund.

However, it is also important to understand the tax implications of investing in mutual funds. Capital gains in mutual funds are the profits investors make on their investments when they redeem or sell their mutual fund units. Whether they are long-term capital gains on equity mutual funds, or short-term gains from debt mutual funds, they are taxed according to the Income Tax Act.

Factors that determine the tax status of mutual funds are

  1. Residence status: Resident of India or non-resident of India (NRI)

  2. Type of mutual fund: Equity oriented funds or non-equity oriented funds (debt mutual fund, hybrid fund etc.)

  3. Holding period: Long-term holding period or short-term holding period

Equity-Oriented Mutual Funds

Equity-oriented mutual funds are those in which the mutual fund scheme invests at least 65% or more of its assets in equity, or equity-related instruments. The rest can be invested in money market securities. For example, the Equity Linked Savings Scheme (ELSS) invests 80% of its assets in equity, and is eligible for a tax deduction of up to Rs. 1.5 lakhs under section 80C of the Income Tax Act.

Non-Equity Oriented Mutual Funds

Non-equity oriented mutual funds are those in which the mutual fund scheme invests less than 65% of its portfolio in equity or equity-related instruments. Examples include gold funds and liquid mutual funds.

Holding Period

  • Long-Term Capital Gain (LTCG): A profit made on investment in the equity mutual fund scheme, which the investor holds for over a year is known as long-term capital gain. Similarly, the profit made on investment in the non-equity mutual fund scheme (or debt fund), which the investor holds for over 3 years is known as long-term capital gain.

  • Short-Term Capital Gain (STCG): A profit made on investment in the equity mutual fund scheme, which the investor holds for less than a year is known as short-term capital gain. Similarly, the profit made on investment in debt fund (or in schemes other than equity-oriented ones), which the investor holds for less than 3 years is known as short-term capital gain.

Mutual Fund Taxation for FY 18-19 with Capital Gain Tax Rates

Capital Gains Tax

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The STCG (Short Term Capital Gains) tax rate on equity funds is 15% for residents of India and NRIs

The Short Term Capital Gains tax rate on Non-Equity funds (or) Debt funds is as per the investor’s income tax slab rate.

The LTCG (Long Term Capital Gains) tax rate on equity funds is 10% above Rs. 1 lakh gain

The Long Term Capital Gains tax rate on non-equity funds is 20% with indexation for residents of India.

A ULIP(Unit Linked Insurance Plan) is one investment instrument that is exempt from LTCG completely. ULIPs hold the rare EEE (Exempt-Exempt-Exempt) status, wherein the principal investment, the accumulated amount and the maturity proceeds are all exempted. Thus, ULIPs have quite the edge over mutual funds. If you are looking to purchase ULIPs and avail high returns as well as tax benefits, you can opt for the Bajaj Allianz ULIPS on Finserv MARKETS. What’s more, you can also benefit from zero allocation charges, some of the top-rated funds in the country, and complete transparency, by opting for the ULIPs on Finserv MARKETS.

Indexation

Indexation, which is applicable to long-term investments, adjusts the price of the underlying asset or investment, thereby lowering the overall tax liability. Indexation is applicable to debt funds, along with other non-equity funds, wherein the purchase price of the investment is adjusted to reflect the effect of inflation, thereby considerably lowering the tax liability.

Conclusion

It is imperative for investors to understand taxation rates, and how much tax you owe for gains on which mutual fund scheme.

 

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