While computing the final tax liability, the basic exemption limit should be first exhausted against other income and balance, if any, can be exhausted against short term capital gains taxable u/s 111A and long term capital gains taxable u/s 112 of the IT Act.
The tax implication on gains derived from mutual funds depends on the type of mutual fund, for instance, whether an investment is made in an Equity Mutual fund or Debt Mutual fund as well as the period of holding of the mutual fund units.
Taxation of Equity Mutual Funds
Equity Mutual funds are referred to as those funds which have at least 65 per cent of equity allocation in their investment portfolios. According to experts, the sale of units of such equity mutual funds should be long term in nature, the period of holding of such units should exceed 1 year, otherwise, such gains would be short term in nature.
The short term capital gains would be subjected to tax in the hands of the investor at the rate of 15 per cent u/s 111A of the IT Act. In the case of long term capital gains, the same would be taxed at 10 per cent u/s 112A of the IT Act on the number of gains exceeding Rs 1 lakh in that particular financial year.
Suresh Surana, founder, RSM India, says “These rates would apply only if the transaction is subjected to STT, otherwise, short term gains would be charged to tax as per the marginal slab rate and long term capital gains would be taxed in accordance with Section 112 of the IT Act in a manner similar to taxation of listed shares. Thus, the tax treatment of listed shares and those of units of equity-oriented mutual funds is the same.”
Taxation of Debt mutual funds
In the case of Debt mutual funds, the gains would be treated as short term in nature provided the units of these funds are sold before 3 years from the date of its acquisition, otherwise, such gains to be categorized as long term in nature.
Surana says, “The short term capital gains are charged to tax in accordance with the applicable marginal slab rate of the investor. Long term capital gains of debt fund, on the other hand, are subjected to tax at 20 per cent along with indexation benefit u/s 112 of the Act.”
Certain things one should keep in mind at the time of computation of capital gains tax;
1. The tax rates are further enhanced by the surcharge and cess applicable to the investor.
2. No deduction under Chapter VI-A or Rebate u/s 87A would be available against Long term capital gain subject to taxation u/s 112A of the IT Act.
3. Calculation of index cost. Surana says, “The indexed cost is calculated by way multiplying the acquisition cost with the ratio of the cost of inflation index of the year of sale and cost of inflation index of the year of purchase. Such indexed cost is then reduced from the Net selling price to arrive at the value of gains.”
4. Long term capital gains derived upto 31 January 2018 would be subject to grandfathering benefit i.e. gains derived upto such date would be exempt from taxation while computing tax u/s 112A of the IT Act.
5. It is pertinent to note that the investor can set off any Long term capital loss only against Long term capital gains. Surana adds, “On the other hand, short term capital loss can be set off against both long term and short term capital gains. The carried forward of the capital loss is permitted for subsequent 8 years.”
6. While computing the final tax liability, the basic exemption limit should be first exhausted against other income and balance, if any, can be exhausted against short term capital gains taxable u/s 111A and long term capital gains taxable u/s 112 or 112A of the IT Act.