How To Avoid Capital Gains Tax on Mutual Funds in India

Capital gains tax can take a sizable chunk of your returns when investing in mutual funds in India. However, with the right approach and understanding of tax laws, it is possible to minimise or even avoid this tax. By using strategies like holding your investments for the long term or offsetting your gains with losses, you can reduce your tax liability. This article discusses in detail how to save on capital gains tax for mutual funds.

What is capital gains tax?

Capital gains are the profits realised from the sale of an asset, such as property, stocks, or bonds, when the selling price exceeds the original purchase price.

There are two types of capital gains-

Short-term capital gain applies when assets are sold within a short holding period, typically within 12 months. 

Long-term capital gain occurs when assets are held for a longer period, typically more than 12 months.

How to avoid capital gains tax on mutual funds in India

Below are some ways in which you can avoid capital gains tax.

1. Offset gains with losses

If you have investments at a loss, you can liquidate them to offset gains from other investments. For example, if you make a capital gain of Rs. 10,000 from selling mutual fund units but also have another investment with a loss of Rs. 4,000, selling the underperforming asset can help reduce your taxable gain. 

This will bring your net taxable gain down to Rs. 6,000, lowering the capital gains tax you need to pay.

2. Systematic withdrawal plan (SWP)

The LTCG tax on equity mutual funds has increased from 10% to 12.5%. So, you may ask, how to avoid LTCG tax on mutual funds? You can opt for a SWP. It allows you to automatically redeem your equity mutual fund units monthly or quarterly. This way, you can keep your withdrawals below the exemption limit of Rs. 1.25 lakh per year, thus saving on tax.

3. Hold investments for the long term

If you sell equity mutual funds within 12 months, you will face a 20% STCG tax. But if you hold your investment for over 12 months, you will pay a reduced 12.5% LTCG tax. Additionally, you can benefit from the Rs. 1.25 lakh exemption limit on LTCG. The longer you hold your investments, the more you benefit from compound returns, and fewer transactions mean less tax.

4. Invest in tax-saving mutual funds

Equity-Linked Savings Schemes (ELSS) provide tax benefits under Section 80C of the Income Tax Act. While ELSS returns are still subject to LTCG tax, you can claim a tax deduction of up to INR 1.5 lakh on your initial investment, lowering your overall tax burden.

To know other ways on how to avoid tax on mutual funds, consulting a financial advisor is advisable. They can help maintain compliance with tax regulations while maximising potential savings. To begin your investment journey and work towards your financial goals, download the Tata Capital Moneyfy app today.