I am aware of how capital gains are taxed in the case of mutual funds. But would like to have clarity on how it works in the case of partial redemptions. How do we get to know the gains or losses when the investment is not redeemed fully?
- Vikas
When you make a partial redemption, you would be selling only a part of your mutual fund units. The purchase date of these particular units is considered vis-a-vis the redemption date to assess whether it's a long-term or short-term capital gain. The principle of First In First Out (FIFO) is used for this purpose. According to this principle, the oldest units are considered to be redeemed first.
Suppose you have Rs 5 lakh in an equity fund, which was invested through SIP over a period of time. And now, you want to redeem Rs 1 lakh out of it. The units considered for this redemption will be the oldest one. Let's assume that for this Rs 1 lakh, you have to redeem 1,000 units. As you invested over a period of time through SIP, it is possible that some of these units were purchased more than a year ago while others may not have completed a year. So, there is a possibility of having both long-term and short-term capital gains. In such cases, the oldest units are considered to be redeemed first. And to calculate capital gains, you need to consider both purchase and redemption date of each unit separately.
This article was originally published on March 26, 2019.
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