Complete Guide on Capital Gains Tax on Shares and Mutual Funds

Capital gains tax is the tax that is imposed on the earnings of stocks, mutual funds, or any other financial assets. Like you pay taxes on your income or the goods purchased, similarly you have to pay taxes on what you earn on your investments over a period of time. A capital gain is equal to the difference between the amount at which you sold the asset minus the price at which you bought the asset.

With the latest amendments in the Union Budget 2024, several things have changed and you might not be aware of that. So, let’s deep dive into all the rules covering capital gains tax on shares and mutual funds.

Rules on Capital Gains Tax on Shares

ith the changes to the holding period and capital gains tax rate, the investor’s home takeaway earnings are also impacted. There will only be two holding periods, 12 months and 24 months.

All listed securities with a holding period of more than 12 months are eligible for LTCG tax while all the remaining assets will have a long term holding period of more than 24 months. In the LTCG realm, the capital gains exemption limit has been increased to ₹1.25 lakh in a financial year from ₹1 lakh. Also, there will be no indexation benefit to adjust the cost.

Here is full coverage on different types of equity holdings taxation, which is applicable from July 23, 2024:

On Listed Shares

Previously, short term capital gains tax on listed companies’ shares was taxed at 15%, and long term capital gains tax at 10%. With effect from July 23, 2024, short term capital gains tax has been increased to 20% and long term capital gains tax also increased to 12.5%. The STCG period is 12 months and after that LTCG period and tax are applicable.

On Unlisted Shares

On unlisted shares, the holding period has been reduced to 24 months from 36 months for long term capital gains tax purposes. Now, the LTCG tax rate is 12.5% while the short term capital gain tax on shares is dependent on your income tax slab rate.

On Listed Foreign Shares

On foreign listed shares, the long term capital gain tax rate is 12.5% without the indexation benefits, while STCG is added to your total income and is taxed accordingly. The holding period for STCG is 24 months and after that, it will go for a long term capital gains tax rate. The LTCG exemption limit of ₹1.25 is not applicable on foreign shares investments.

On Unlisted Foreign Shares

Long term capital gains tax on unlisted foreign shares are also taxed at a flat rate of 12.5% while STCG is taxed at your income slab rate. The short term holding period is 24 months with the above going for the long term capital gain tax rate.

Here is the summary of the major changes in capital gains tax on shares:

Long term Capital Gain Tax on Shares
	Holding Period		Tax Rate
	Old	New	Old	New
Listed Shares	After 12 months	After 12 months	10%	12.5%
Unlisted Shares	After 36 months	After 24 months	20% with indexation benefits	12.5%
Short term Capital Gain Tax on Shares
	Holding Period		Tax Rate
	Old	New	Old	New
Listed Shares	Till 12 months	Till 12 months	15%	20%
Unlisted Shares	Till 36 months	Till 24 months	Tax slab rate	Tax slab rate

Rules on Capital Gains Tax on Mutual Funds

After understanding the short term capital gains tax and long term capital gains on different types of equities, let’s go through the taxation of mutual funds, which are very famous instruments among retail investors.

Here are the different rules concerning the mutual fund’s earnings world.

Equity Oriented Funds

An equity-oriented mutual fund is a fund that has a minimum of 65% exposure in equities. It does not include the equity-oriented fund of funds that invest in other equity funds. Similar to short term capital gain tax on shares, the STCG on such funds has been increased to 20% from 15%.

Also, the same rule of long term capital gain tax on shares is considered here with the revised rate of 12.5% from earlier 10%. The holding period is 12 months and the exemption limit for LTCG has been increased to ₹1.25 lakhs.

Specified Mutual Funds

In this category, fund of funds (which invest in other mutual funds), debt funds (which have more than 65% exposure to debt and money market securities), gold ETFs, bond ETFs, liquid ETFs, fund of funds overseas, and infrastructure debt funds are covered.

All the taxation is considered for short term capital gains tax with the earnings being added to your income and then it is taxed according to your income tax slab rate.

Other Mutual Funds

The mutual funds which are not covered in the above two categories will be covered in other mutual funds. Examples include gold mutual funds and foreign equity funds. The short term capital gains tax period is less than 24 months and LTCG is for more than 24 months.

The short term capital gains tax will be applied according to your income tax slab rate and long term capital gain tax rate is a fixed rate of 20%.

Here is the detailed list of capital gains tax on different types of mutual funds:

Mutual Fund Category	Holding Period	STCG Tax	LTCG Tax
Equity-oriented mutual fund (which invests equal to or more than 65% in domestic equity shares)
Redemption made after July 23, 2024	More than 12 months	20%	12.5%
Specified mutual fund or debt-oriented fund (which invests equal to or more than 65% in debt and money market instruments)
Investments made before April 1, 2023
Redemption made between April 1, 2024 and July 22, 2024	More than 36 months	Tax slab rate	20% with indexation
Redemption made on or after July 23, 2024	More than 24 months	Tax slab rate	12.5%
Investments made after April 1, 2023, but redeemed at any time	Not applicable	Tax slab rate	Tax slab rate
Hybrid mutual fund (which invests more than or equal to 35% but less than 65% in domestic equity)
Redemption made between April 1, 2024 and July 22, 2024	More than 36 months	Tax slab rate	20% with indexation
Redemption made on or after July 23, 2024	More than 24 months	Tax slab rate	12.5%
Other mutual funds (covers gold and silver ETFs or FoFs, domestic FOFs with greater than 35% in equity funds, international funds/ FoFs, and some multi-asset allocation funds)
Investments made before April 1, 2023
Redemption made between April 1, 2024 and July 22, 2024	More than 36 months	Tax slab rate	20% with indexation
Redemption made on or after July 23, 2024	More than 24 months	Tax slab rate	12.5%
Investments made after April 1, 2023
Redemption made between April 1, 2024 and July 22, 2024	Not applicable	Tax slab rate	Tax slab rate
Redemption made between July 23, 2024 and March 31, 2025	Not applicable	Tax slab rate	Tax slab rate
Redemption made on or after April 1, 2025	More than 24 months	Tax slab rate	12.5%

Conclusion

With the simplified holding period, changes in capital gains tax rate, and the additional rise in LTCG exemption, the overall tax structure has been changed. However, this has not affected India’s rising stock and mutual fund market. It has not shaken the investors’ confidence in the bullish environment. With investors pouring more money into the stock market and mutual funds, there can be a long term potential to create wealth.

If you also want to take part in this investment rush, then open your demat account now with SMC Global Securities and invest smartly in stocks and mutual funds.

FAQs

How much capital gain is tax free?

Capital gain is not tax-free until and unless you are making long term capital gains of up to ₹1.25 lakh in a financial year.

How is capital gain tax calculated?

Capital gains tax is calculated by subtracting the sale price of an asset minus the total cost of acquisition of an asset. Now, no indexation benefit is considered in the calculation.

Is short-term capital gain below 1 lakh taxable?

No, short term capital gains tax on shares, mutual funds, or any other capital assets are taxable irrespective of the amount of gains.

Do I have to pay short-term capital gains tax if I have no income?

You might have to pay short term capital gains tax if you don’t have any income when you are investing in shares or equity funds but not in debt funds. It is totally dependent on the type of asset you are investing in.

References:
https://economictimes.indiatimes.com/wealth/tax/new-stcg-ltcg-tax-rates-rules-exemption-for-equity-unlisted-equity-foreign-equity-shares-for-fy2024-25/budget-2024-changes-capital-gains-tax-rules/slideshow/112322267.cms
https://economictimes.indiatimes.com/wealth/tax/mutual-fund-taxation-after-budget-2024-new-stcg-ltcg-rates-on-equity-debt-mfs-etfs-fund-of-funds-gold-funds-gold-etfs-explained/articleshow/112310878.cms?from=mdr
https://economictimes.indiatimes.com/mf/analysis/budget-2024-decoded-capital-gains-you-tax/articleshow/112000847.cms?from=mdr

Author: All Content is verified by SMC Global Securities.