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Capital gains tax for debt mutual fund

Short-term capital gains (if exit is within 3 years) on debt funds will be added to your income and taxed as per your applicable tax slab

I am coming under tax bracket of 20per cent. If I invest ₹10 lakh in a liquid or ultra short term debt fund for 4 or 5 years how much tax do I have to pay? Please give your answer with numerical example.
- Ramesh M

If you sell them within 3 years, capital gains on debt funds are treated as short term. It will be added to your income and taxed as per your applicable tax slab. Long term capital gains (if exit is after 3 years) are taxed at 20 per cent with an indexation benefit on your cost.

Investment holding periodTaxation
Short Term Capital Gain36 months or lesseradded to income and taxed as per applicable slab rate
Long Term Capital Gainmore than 36 months20% with indexation

Let us take an example, Since we do not have the Cost Inflation Index for future years, we will take an example of past. Say you invested ₹10 lakhs in 2010-2011. Assuming the fund returned 9 percent a year, and you redeem it for ₹15,38,624 in 2016-17, your long term capital gain would be ₹5,38,624.

However, if you index the cost with the Cost Inflation Index (provided by the IT department) for 2010-11 and 2015-16, then the cost would be ₹1,52,0393 (₹10 Lakh * 1081/711). Then the long term capital gain would be ₹18231 (1538624-1520393). A 20 percent tax on this would be ₹3646.

So, as per this example, your capital gains tax for this financial year will be ₹3646.

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