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The amount of tax charged when selling a mutual fund depends on whether the fund is equity or debt and for how long you held it. Therefore, it is important to understand the tax rules before selling mutual funds, otherwise unnecessary losses may occur.
New Delhi. Most people who invest in mutual funds understand the returns very well, but often ignore taxation, whereas the truth is that the capital gains tax imposed on selling mutual funds can significantly affect your actual profits. Sometimes selling funds at the wrong time may make you pay unnecessary taxes. Therefore, before selling the fund, it is very important to understand when, how and how much tax will be levied. Let us know how tax is imposed on selling equity and debt mutual funds, which rules have changed recently and what things you can keep in mind to reduce your tax burden.
How are mutual funds taxed?
Whatever profit you get on selling mutual funds is called capital gain. It can be of two types:
- Short Term Capital Gain (STCG)
- Long Term Capital Gain (LTCG)
The tax rates applicable on these two are also different. It entirely depends on which category of fund (equity or debt) you bought and for how long you held it. The taxation rules on equity and debt mutual funds are completely different from each other, so it is important to understand both separately.
Tax on equity mutual funds
Equity mutual funds are those funds in which at least 65% is invested in the stock market.
- If sold within 1 year – it will be considered short term capital gain. The tax rate on this is 20%.
- If you sell after 1 year, it will be considered as long term capital gain. The tax rate on this is 12.5%. But there is also a relief. Profits up to Rs 1.25 lakh in a financial year are tax-free. This means that if you sell the mutual fund after more than a 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
In debt mutual funds, money is invested in bonds, government securities and corporate debt. After 2023, there has been a major change in the taxation rules on these funds, which investors must know. Tax on debt funds depends entirely on when you bought the fund.
- Debt funds purchased before April 1, 2023 – If sold in a period of less than 2 years, it will be considered short term. Tax will be levied as per your income tax slab. If you sell after 2 years, it will be 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, the entire gain will be taxable as per your income tax slab. This means that now the benefit of long term capital gain in debt funds has been completely lost. Debt funds will be taxed at the same rate at which your salary or other income is taxed.
5 important things before selling mutual funds
- Check the holding period – even a difference of 1 day can change the tax.
- Avoid selling in equity funds till completion of 1 year.
- Keep in mind the exemption of Rs 1.25 lakh on long term equity gains.
- In debt funds, check whether the unit was purchased before or after April 1, 2023.
- Plan your portfolio at the end of the financial year to save more tax
Sell it after considering tax, only then you will get real profit.
Good earnings in mutual funds are considered real only when its tax is managed properly. Selling the fund at the wrong time may result in you paying unnecessary taxes of up to 20% or 30%. Keeping your investment in equity funds for a long time and checking the date of purchase in debt funds can significantly reduce your tax burden. Therefore, next time before selling mutual funds, understand these rules, otherwise loss may occur.
