Mutual Fund: While most mutual fund investors understand returns well, they often overlook taxation. The truth is that capital gains tax on selling mutual funds can significantly impact your actual profits. Sometimes, selling funds at the wrong time can result in unnecessary tax payments. Therefore, it’s crucial to understand when, how, and how much tax will be levied before selling funds. Let’s explore how tax is applied when selling equity and debt mutual funds, what recent rules have changed, and what considerations can help reduce your tax burden.

How are mutual funds taxed?

Any profit you make from selling a mutual fund is called a capital gain. This can be of two types:

Short Term Capital Gain (STCG)

Long Term Capital Gain (LTCG)

The tax rates applicable to both are also different. This depends entirely on the category of fund you purchased (equity or debt) and how long you held it. The taxation rules for equity and debt mutual funds are completely different, so it’s important to understand them separately.

Tax on Equity Mutual Funds

Equity mutual funds are those funds in which at least 65% of the corpus is invested in the stock market.

If sold within 1 year – this is considered a short-term capital gain. The tax rate on this is 20%.

If you sell after one year, this is considered a long-term capital gain. The tax rate on this is 12.5%. However, there is a relaxation: Gains up to Rs 1.25 lakh per financial year are tax-free. This means that if you sell a mutual fund after more than one year and your profit is less than Rs 1.25 lakh, you will not have to pay any tax. This exemption applies only to equity funds.

Tax on Debt Mutual Funds

Debt mutual funds invest in bonds, government securities, and corporate debt. After 2023, there will be a significant change in the taxation rules for these funds, which investors should be aware of. The tax on debt funds depends entirely on when you purchased the fund.

Debt funds purchased before April 1, 2023—if sold within less than two years, they will be considered short-term. Tax will be levied according to your income tax slab. If sold after two years, it will be considered a long-term capital gain. The tax rate on this will be 12.5%.

Debt funds purchased after April 1, 2023—whether the holding period is 1 year or 10 years—will be taxable as per your income tax slab. This means that the benefit of long-term capital gains on debt funds has now been completely eliminated. Debt funds will be taxed at the same rate as your salary or other income.

5 important things to know before selling mutual funds

Check the holding period – even a difference of 1 day can change the tax.

Avoid selling equity funds until one year has passed.

Keep in mind the exemption of Rs 1.25 lakh in long term equity gains.

In debt funds, check whether the units were purchased before April 1, 2023 or after.

Plan your portfolio at the end of the financial year to save more tax