Capital Gains Tax on Mutual Funds: STCG, LTCG, and the Grandfathering Clause Explained
The 2024 Budget changed capital gains tax rates significantly. Equity LTCG is now 12.5%, debt funds lost indexation permanently. Here's a complete breakdown with calculation examples.
What Changed in Budget 2024
The Union Budget 2024 overhauled capital gains taxation:
- •Equity LTCG rate: 10% → 12.5% (exemption stays ₹1.25 lakh, up from ₹1L)
- •Equity STCG rate: 15% → 20%
- •Debt funds: Indexation benefit permanently removed (taxed as per slab)
- •Holding period for listed assets: unchanged (1 year for equity, 2 years for debt MF)
Equity Mutual Funds
Short-Term Capital Gains (STCG)
- •Holding period: Less than 12 months
- •Tax rate: 20% flat (no slab rate, no indexation)
- •Example: Buy at ₹1,00,000 in Jan, sell at ₹1,20,000 in Oct = Gain ₹20,000 → Tax ₹4,000
Long-Term Capital Gains (LTCG)
- •Holding period: 12 months or more
- •Tax rate: 12.5% on gains above ₹1.25 lakh
- •Example: Gains of ₹3 lakhs → Taxable = ₹1.75 lakhs → Tax = ₹21,875
The Grandfathering Clause (for pre-Jan 31, 2018 investments)
Units purchased before January 31, 2018 use the Fair Market Value (FMV) as on Jan 31, 2018 as the cost of acquisition — not your actual purchase price. This protects gains accumulated before LTCG was reintroduced.
Example:
- •Bought 100 units at ₹50 (₹5,000) in 2015
- •FMV on Jan 31, 2018: ₹100 (₹10,000)
- •Sold at ₹150 (₹15,000) in 2026
- •LTCG = ₹15,000 − ₹10,000 = ₹5,000 (not ₹10,000)
Debt Mutual Funds (Post April 2023)
Since April 1, 2023, no indexation on debt mutual funds regardless of holding period. All gains are added to your income and taxed at your applicable slab rate.
| Income Slab | Effective Debt MF Tax Rate |
|---|---|
| Up to ₹7L (new regime) | 0% |
| ₹7L–₹10L | 10% |
| ₹10L–₹15L | 15-20% |
| ₹15L+ | 30% |
Hybrid Funds — Which Category Applies?
| Fund Type | Equity Allocation | Tax Treatment |
|---|---|---|
| Aggressive Hybrid | >65% equity | Equity LTCG/STCG rules |
| Conservative Hybrid | <65% equity | Debt tax rules (slab rate) |
| Balanced Advantage | Dynamic — check factsheet | Usually equity |
| Arbitrage Funds | >65% equity | Equity rules (but returns ~FD) |
With ₹1.25 lakh annual LTCG exemption, smart investors harvest gains annually:
1. In March, check your equity fund portfolio
2. If unrealised gains are approaching ₹1.25 lakh, sell and immediately rebuy
3. This books gains tax-free, and your new cost basis is higher
4. Repeat every year — over 10 years this saves significant tax
Calculation: ₹1.25 lakh × 12.5% = ₹15,625 saved per year if you harvest annually
Reporting in ITR
Capital gains from mutual funds must be reported in Schedule CG of ITR-2 or ITR-3. Your mutual fund house provides a Capital Gains Statement (available on their portal or CAMS/KFintech) — don't rely on the broker app summary.
E-Square Tip: If you hold multiple funds across AMCs, get a consolidated capital gains statement from CAMS or KFintech before filing. Many clients miss gains from old folios and face notices later.
E-Square Financials
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