Mutual Funds: LTCG tax on equity MFs to be paid only if holdings are redeemed & gains above Rs 1 lakh a year

Do I have to calculate the long-term capital gains (LTCG) tax myself every year on my equity mutual funds and pay it at the time of filing the returns?
—Vivek Singh

LTCG tax on equity mutual funds needs to be calculated only if one redeems or exits (either partially or fully) from the holding. Accordingly, tax (if any) needs to be paid only redemption of the fund holding and not otherwise. Further, LTCG from equity up to Rs 1 lakh per annum are exempt from taxes.

How do I do indexation on debt fund? How will it lower tax outgo?
—Pramod Bhaskar

The cost indexation benefit is available for debt funds that have been held for atleast three years. Here, the cost of the holding can be adjusted (increased) for inflation. The LTCG is calculated based on the difference between the redemption value and indexed cost of the holding. As per prevailing tax laws, LTCG from debt funds are taxed at 20% if indexation benefit is availed and at 10% without indexation. The I-T authorities publish the cost inflation index applicable for each financial year. Consult your tax advisor for details on debt taxation and indexation.

l Is it advisable to invest in equity-linked savings scheme? My annual tax deduction under Section 80C is exhausted by repayment of home loan principal amount.
—P Uday

Equity Linked Savings Schemes (ELSS) invest across large, mid and small cap stocks based on the mandate of the fund and have performed fairly well across timeframes in line with the broad equity market performance and other fund categories. ELSS funds carry a lock-in of three years due to the tax benefits offered. Since your Section 80C deductions are being met by home loan repayment, it would be advisable to consider other categories of open ended equity funds including large caps, diversified equity, small and mid-caps, etc., based on your investment horizon and risk appetite. Open ended equity funds allow the flexibility of exiting at any point of time (subject to exit loads which are typically applicable for exits within 12-18 months of investment). This flexibility would be important in case the fund underperforms its peers / benchmark indices over 18 to 24 months or if there’s any significant change in investment team (e.g. fund manager) or strategy of the fund.

TThe writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonal finance@expressindia.com