Mutual Funds are a type of investment scheme in which funds are pooled from various investors and invested in bonds, stocks, or company shares. The Security and Exchange Board of India regulates the funds, known as SEBI.
Professional fund managers manage these investments collectively to induce long-term capital gains on Mutual Funds or short-term capital gains to provide higher returns.
Mutual Funds offer two types of returns, capital gains and dividends. A capital gain signifies the difference between the cost of purchase of a capital asset and the selling value.
For example –Mr Ghosh invested Rs. 5 Lakh in a Mutual Funds scheme on 1st August 2015. The value of the asset on 1st August 2019 was Rs. 7.5 Lakh. The long-term capital gains on Mutual Funds that Mr Ghosh earned was Rs. 2.5 Lakh.
Capital Gains on Mutual Funds
Capital gains occur when individual benefits from the capital appreciation of securities by selling or transferring them at the opportune period. A fund manager predicts that opportune moments when selling a fund would reap the most profits or gains.
These securities can be classified into two types depending on their holding period – long-term capital assets and short-term capital assets. Capital gains are differentiated based on the kind of asset sold or transferred.
If listed equity funds and equity-oriented balanced funds are held for a period less than 12 months or 1 year, then they would be considered short-term capital assets, and if they are held for a period longer than that, they would be regarded as long-term capital assets.
In the case of unlisted equity funds, debt funds and debt-oriented balanced funds if the holding period is longer than 3 years or 36 months, they are classified as long-term capital assets.
If the period is less than 3 years, it is considered short-term capital assets.
The following table demonstrates the classification–
Types of Funds | Long-term Asset | Short-term Asset |
Listed equity funds and equity-oriented hybrid funds | More than 12 months | Less than 12 months |
Unlisted equity funds | More than 36 months | Less than 36 months |
Debt funds and debt-oriented balanced funds | More than 36 months | Less than 36 months |
LTCG tax on Mutual Funds is comparatively lower than short-term capital gains tax on Mutual Funds. This taxation system has been adopted to encourage investors to keep their money invested for a longer period.
Types of Capital Assets on Mutual Funds
There are two types of capital assets on Mutual Funds, such as long term and short term. Any asset such as equity shares or equity-oriented Mutual Funds that are held by an individual for more than 12 months is regarded as a long-term capital asset.
Similarly, any capital asset such as equity shares or equity-oriented Mutual Funds held for less than 12 months, are known as short-term capital assets.
However, this consideration is applicable only if your date of transfer is after 10th July 2014 irrespective of the date of purchase.
Besides, in the case of any asset acquired as a gift or inheritance, the tenure for which the asset was held by the first owner will be considered to determine whether it is a short-term or long-term capital asset.
What is an Indexed Cost of Acquisition?
The cost of acquisition is indexed by the application of the cost inflation index, also known as CII. The reason behind this application is to adjust the inflation on your Mutual Funds asset over the years.
This calculation reduces the capital gains on Mutual Funds and increases the cost base of an individual.
