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How to calculate capital gains for debt mutual funds

This is more relevant in the growth option, where value earned gets accumulated and added to your net asset value


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Debt mutual funds provide investors a good option to get stable returns. At the same time these funds are liquid and you can withdraw your money any time after you start. However, at the time of redemption, you have to be aware of the capital gains tax on the gains you earn. Capital gains refer to the difference between your redemption value and the initial investment. Here is how you can do that.

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Step 1: Take out your account statement and check if you were invested in the dividend or the growth plan of a fund. In case of dividend plan, surplus is paid out as dividend, which is taxed as dividend distribution tax at 25%. Once dividend is paid, the net asset value falls to the extent of the payout.

Due to the fall, at the time of redemption the value may not be more than the initial investment. Hence, sometimes capital gains aren't relevant in dividend options. These are more relevant in case of the growth option, where value earned gets accumulated and added to your net asset value.

Step 2: Once you have ascertained the type of plan you were invested in, calculate the number of days you have been invested in the fund. In your account statement check the start or purchase date and then check the date you sold the units. The difference in the two dates is what you need to calculate. Anything less than 36 months qualifies for short-term capital gain, else it is long-term capital gain.

Step 3: From your redemption value take out the initial investment to ascertain the amount of gain. If it is short-term capital gain, your tax is calculated as per the income tax rate applicable to you, i.e., 10%, 20% or 30%. If it is long-term capital gain, the tax rate is 20% with cost indexation. Indexation adjusts your cost of buying for inflation, thereby making it higher.

This higher adjusted cost is then deducted from the redemption value to arrive at the capital gains, which are taxed at 20%. Both dividend distribution tax and capital gains tax are subject to surcharge of 12% and education cess of 3%.

In arrangement with HT Syndication | MINT

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