5 min read • Published 20 Feb 25
How to Calculate Capital Gains Tax on Mutual Funds
Table of Contents
Capital gain occurs when an individual or a corporation sells a capital asset at a higher value than it is acquired for. Capital assets either provide a cash flow or their value increases over time. The sale of these assets at a profit is taxable.
Understanding the workings of capital gains tax is essential for better financial planning and tax saving purposes. For example, this is how capital gains tax for property would look like:
| Tax category | Capital gains (Rs) | Tax on Capital Gains (Rs) |
| STCG | 5,00,000 | 1,50,000 |
| LTCG (old rules) | 5,00,000 | 70,978 |
| LTCG (new rules) | 5,00,000 | 62,500 |
For Rs. 5,00,000, the tax could amount to Rs. 1,50,000. But how is capital gains tax calculated? Head to the blog for a detailed explanation and breakdown of the process.
What is Capital Gains Tax?
Capital gains tax is imposed when you sell off an asset for a higher price than what you acquired it for. The level of this tax is based on the nature of the asset and how long it has been in your possession. Capital gains can be the following:
- Long-Term Capital Gains – Any asset held by a person for longer than 24 months is deemed long-term. For securities, such as stock and bonds, this requirement is shorter, 12 months. It can be noticed that prior to the budget of 2024, the retention period for several assets was 36 months.
- Short-Term Capital Gains – Any gains made on assets disposed of within a time period of not more than 24 months falls under short-term capital gains. For listed securities, this duration remains at 12 months.
How to Calculate Capital Gains Tax
For better understanding on how capital gains tax is calculated here is an example:
Short-Term Capital Gain
Let’s explore how short-term capital gains (STCG) are calculated for financial and non-financial assets
Case 1 : Property
Assume that Mr. A purchased a property worth Rs. 10,00,000 on 1st January 2024 and sold it for Rs. 15,00,000 on 30th December 2024.
Since the property has been held for less than 24 months it will be taxed at the slab rates of the property holder.
So, the capital gains here will be:
Capital gains = Cost of selling the asset – Cost of acquiring the asset
Capital gains = Rs.15,00,000 – Rs,10,00,000
Capital gain = Rs.5,00,000
The amount of Rs.5,00,000 will be taxed as per the individual’s tax slab.
Case 2: Listed Securities
Assume, if instead of property, the asset was any listed securities, in that case the investor would have to pay a flat 20% tax on short-term capital gains irrespective of the amount of gain as per the new rules introduced in 2024 budget.
Capital gains tax = 20% of (Selling price of Asset – Cost of Acquiring the asset)
Capital gains tax = 20% * Rs.5,00,000
Capital gains tax = Rs.1,00,000
The capital gains tax payable is Rs. 1,00,000.
Long-Term Capital Gain
Understanding how long-term capital gains (LTCG) are calculated for financial and non-financial assets.
Case 1: Property
Let us assume that Mr. A purchased a property worth Rs. 10,00,000 on 1st January 2022 and sold it for Rs. 15,00,000 on 1st January 2025.
For long-term capital gains, if the property is purchased before 23rd July 2024, taxpayers get a choice of either 20% tax with indexation benefit or 12.5% tax without indexation benefit. But if the property is purchased after 23rd July, 2023, the taxpayers will have to follow new rules. Now let’s assume the property has been purchased on 1st January 2022 (FY22) and the investor chooses –
- With Indexation
For an asset purchased in FY2022 and sold in FY2025, the cost of acquisition will be adjusted using the cost inflation index (CII). Itis a numerical scale used to adjust the purchase price of an asset for inflation, helping calculate long-term capital gains tax.
In this case:
CII of FY2025 (Year of Sale): 363
CII of FY2022 (Year of Purchase): 317
Adjustment factor: 363/317
Hence,
Indexed cost of acquisition = Rs.10,00,000 * (363/317) = Rs.11,45,110
Now,
Capital gains tax = 20% of (Selling price of Asset – Indexed cost of acquisition)
Capital gains tax = 20% of (15,00,000 – 11,45,110)
Capital gains tax = Rs.70,978.
The capital gains tax payable is Rs. 70,978.
- Without Indexation
Alternatively, if the taxpayer opts to calculate long-term capital gains without indexation, the following calculation applies:
Capital gains tax = 12.5% of (Selling price of Asset – Cost of Acquiring the asset)
Capital gains tax = 12.5% of (15,00,000 – 10,00,000)
Capital gains tax = Rs. 62,500.
The new rules for long-term capital gains can be beneficial for those property holders who have purchased their property recently and are not getting substantial benefits from indexation. For property holders who have held the property for a long period, availing indexation can be more beneficial.
Case 2: Listed Securities
Now, assume instead of property the asset was a listed security, in that case, investors will have to follow the new rules. Because regardless of whether a financial asset is purchased before or after 23rd July, 2024, if they are being sold after this date and fall under long-term capital gains (more than 12 months), new rules have to be followed.
Capital gains tax = 12.5% of (Selling price of Asset – Cost of Acquiring the asset – Rs.1,25,000 (exemption))
Capital gains tax = 12.5% of Rs.3,75,000
Capital gains tax = Rs. 46,875
Changes in Capital Gains Tax in 2024
The 2024 budget introduced some major changes in the capital gains tax structure such as:
- Indexation: Prior to the 2024 budget changes, taxpayers were permitted to adjust the original purchase value of their property to allow for inflation. This helped in bringing down the acquisition cost of an asset. The indexation benefit has been removed.
- Time period: The 36-month time frame has been removed. From 2024 onwards the classification for long-term and short-term capital gains will be made on a 12-month and 24-month horizon.
- Unlisted bonds and debentures: Gains on unlisted bonds and debentures will always be treated as short-term capital gains irrespective of holding periods and will be taxed at slab rates.
Tax Rates on Capital Gains
The capital gain tax rates before and after 23rd July 2024 are as follows:
Capital gains tax structure if the asset has been transferred before 22nd July 2024:
- Long-term capital gains – A 10% tax is applicable above the gains of Rs. 1,00,000 for financial assets like listed securities and mutual funds units held for more than 12 months and 20% for non-financial assets such as land, property, etc with indexation benefit, held for longer than 36 months.
To clarify, the Rs. 1,00,000 exemption was not applicable for property and indexation benefits were not available for listed securities.
- Short-term capital gains – A 15% tax regardless of the gains for listed securities (held for less than 12 months) and slab rates for transfer of property (held for less than 36 months).
Capital gains tax structure if the asset is transferred on or after 23rd July 2024
- Long-term capital gain – A 12.5% tax rate above the gains of Rs. 1,25,000 for listed securities held for more than 12 months and 12.5% tax for property and other assets held for more than 24 months but without indexation benefits. The indexation benefits have been removed entirely after the 2024 budget.
The Rs.1,25,000 exemption is not available for property.
- Short-term capital gains – A 20% tax rate applies to all gains from listed securities (kept for under 12 months), and slab rates apply to property transfers (kept for under 24 months).
If someone has bought a property on or before July 22, 2024, they can choose either the old tax system or the new tax system, whichever has the lower tax outgo. But for shares, if they are held for longer than 1 year and sold after 23rd July 2024 the new rules will follow, taxpayers do not get a choice for listed securities.
Capital gains Tax Exemptions
Taxpayers can deduct certain expenses from the selling price of the asset. Some of these expenses include brokerage or commission paid, money spent on reporting and renovating the property, cost of stamp papers, travelling expenses associated with selling the asset, broker commissions, etc.
Conclusion
Understanding how you calculate capital gains tax is crucial for better financial management. This knowledge helps you in keeping track of your money and maximize your savings. We also have an obligation to pay capital gains taxes by the deadline to avoid penalties or fines from tax authorities.
Q: Can you use profits from selling one asset to cover losses from selling another?
Yes, losses from one asset can offset gains from another asset. A short-term capital loss is adjustable against long and short-term capital gains whereas long-term capital losses can only be offset by long-term capital gains.
Q: How are capital gains made in selling assets received as gift, inheritance, etc calculated?
Gains earned by selling assets received by gift or inheritance are taxable. The price the original owner paid determines the cost of acquisition. The holding period also starts from when the original owner first held the asset.
Q: Are gains on sales of art and precious antiques taxed under capital gains?
Gains made from selling precious art and antiques are treated similarly to other assets. These are also considered capital assets and are taxed accordingly. The tax depends on the holding period and cost of acquisition.
Q: Is removal of indexation good or bad for taxpayers?
Indexation has mixed effects. In some scenarios, it has increased the tax burdens since the cost of acquiring the asset is not adjusted for inflation, therefore increasing the tax liability. On the other hand, tax exemption has been increased from Rs. 1,00,000 to Rs. 1,25,000.
Q: What is the tax treatment for loss on sales of capital assets?
Losses incurred on sales of capital assets can be offset against capital gains. Also, any additional losses can be carried forward for eight consecutive years. Deductions can be claimed for these losses.
