Let us understand the tax on mutual fund returns with the help of an example.
Sheetal invested Rs. 7.5 lakhs in a diversified equity fund. After two years, her investment was worth Rs. 9 lakhs. She needed money for her daughter’s higher education and hence redeemed the mutual fund units. Let us see how the capital gain tax will be calculated in this case.
Purchase price of mutual fund units: Rs. 7.5 lakhs
Redemption value of mutual fund units: Rs. 9 lakhs
Capital gain = Rs. 9 lakhs – Rs. 7.5 lakhs = Rs. 1.5 lakhs
Holding period: More than one year (Sheetal redeemed her mutual fund units after two years)
Hence, in this case, the long-term capital gains (LTCG) tax will be applicable.
From the LTCG of Rs. 1.5 lakhs, the first Rs. 1.25 is exempt.
The remaining Rs. 25,000 LTCG will be taxed at 12.5% without indexation.
The LTCG tax will be Rs. 3,125