Long Term Capital Gains Tax on Mutual Funds Investment
63Question: If I invest money now in open-ended equity mutual funds and if the total units value goes 12 lakhs after 6 years, do I need to pay tax on this amount when I sell the units? As I know, long-term capital gains tax on mutual funds investment is zero, but if amount is more than 10 lakhs, then do I need to pay tax?
Answer: The gains would be tax exempt irrespective of its quantum. The answer may change slightly in case you opted for dividend reinvestment or bonus option while investing. Suppose that you have dividend reinvestment option, if yes, then gain on sale of those units which represent dividends reinvested during the one year period immediately preceding the date of redemption would be taxable as short term capital gains which is taxed lower of slab rate and 10% plus applicable surcharge and education cess. If it sounds complicated, then here is an example:
Suppose you invested Rs. 100000 on January 1, 2005 (Dividend Reinvestment Option). You received 10,000 units of Rs. 10 each. On December 1, 2006 dividend of 25% is declared. Let's assume the post dividend NAV is Rs. 25. Therefore, dividend of Rs. 5,000 would be reinvested @ Rs. 25 and you would receive 1,000 units as reinvested dividends.
If you sell 11000 units on November 1, 2007 @ Rs. 30 then long term capital gains of Rs. 200000 on first 10,000 units would be tax exempt. Capital gains on 1000 units, which were received as reinvested dividend, would be taxable as short-term capital gains. The short-term capital gain would be (30-25) X 1,000 = Rs. 5,000.
Similar logic would be applicable for bonus units, except that while computing capital gains on redemption of bonus units the cost of thereof would be considered as Rs. Zero.
One very important point to note here is I am assuming FIFO method for computing the cost. Though one has to compulsorily follow FIFO method for computing cost of shares, no specific method has been made mandatory for mutual funds. Therefore, one can follow weighted average or even LIFO method as well.
Hope this helps.
