Long Term Capital Gain (LTCG) Tax on Mutual Funds - Tax Implications on Mutual Funds

When you invest in mutual funds, you hope your money will grow. But did you know that the government also takes a share of your profits? That’s called capital gains tax. And when you keep your investment for a long time, it is taxed under something called Long Term Capital Gains (LTCG).

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What is Long Term Capital Gain (LTCG) Tax?

When you invest in mutual funds and sell them after holding for a long time, the profit you make is called Long Term Capital Gain.

The word “long-term” simply means:

• For equity mutual funds:Held for more than 1 year
• For debt mutual funds: Held for over 3 years (but this changed recently—more below)

These gains are taxed under LTCG rules, which are different from short-term tax rules.

Also read: Smart Ways to Reduce or Avoid LTCG Tax on Mutual Funds

When Do You Have to Pay LTCG Tax?

You pay LTCG tax when:

• You sell your mutual fund units
• You make a profit on the sale
• You held the units for more than 1 year (for equity) or more than 3 years (for old debt fund rules)

Even though the money comes to your bank, you still need to report it in your ITR and pay tax if it’s above the free limit.

LTCG Tax Rules for Equity Mutual Funds

Condition

What Applies

Holding period > 1 year

Treated as long-term capital gain

Tax rate

10% on profits over ₹1 lakh/year

Indexation benefit

Not available

Tax-free limit

First ₹1 lakh in gains is not taxed

LTCG Tax Rules for Debt Mutual Funds (after April 1, 2023)

Earlier, if you held debt mutual funds for more than 3 years, you got a tax benefit called indexation (adjusting for inflation). But from April 2023, this benefit is gone.

Now, most debt mutual funds are taxed as per your income slab, even if you hold them for the long term.

Example:

• You invest ₹2 lakh in a debt fund in 2024.
• You sell it in 2027 for ₹2.5 lakh.
• Your gain = ₹50,000
• Tax = As per your income tax slab (say 20%)

So, the LTCG rule doesn’t apply the same way anymore for debt mutual funds.

Simple Example to Understand LTCG on Equity Funds

Let’s say:

• You bought mutual fund units in June 2022 for ₹1,00,000.
• You sell them in July 2024 for ₹2,50,000.
• Profit = ₹1,50,000

Now:

• First ₹1,00,000 is tax-free.
• Tax is 10% on remaining ₹50,000 = ₹5,000

That’s how the LTCG tax works.

How to Report and Pay LTCG Tax?

Here’s what to do:

1. Track your holding period – Know if your fund qualifies as long-term.
2. Use capital gains statements – Your broker or fund house will give this.
3. Include LTCG in ITR – Mention gains in your tax return.
4. Pay tax on time – If total tax payable is over ₹10,000, you may need to pay advance tax.

Pros and Cons of LTCG Tax

Benefits

Limitations

Lower tax rate (10%) than income tax slab

No indexation for equity funds

₹1 lakh yearly gain is tax-free

You still need to track and file tax returns

Tax applies only when you redeem

Debt funds now lose indexation benefit

LTCG vs STCG (Short Term Capital Gains)

Type of Fund

Holding Period

Tax Rate

Equity Mutual Fund

> 1 year = LTCG

10% over ₹1 lakh

≤ 1 year = STCG

15% flat

Debt Mutual Fund

(Before Apr 2023) > 3 yrs = LTCG

20% with indexation

Now: all taxed as per slab

Based on your income bracket

Final Thoughts

LTCG tax is not something to be scared of. In fact, it’s better than regular income tax in many cases. Knowing when and how it applies can help you plan your investments better, time your redemptions smartly, and save more money.

With expert guidance from platforms like Motilal Oswal, you can manage your investments and taxes wisely—all under one roof.