Long-Term Capital Gains (LTCG) — Rules & Rates (Post Budget 2024)
Definition
Long-Term Capital Gains (LTCG) arise when mutual fund units are held beyond the minimum holding period before redemption. For equity-oriented funds, LTCG applies when units are held for 12 months or more, taxed at 12.5% on gains exceeding Rs 1,25,000 in a financial year (post July 2024 Budget). For non-equity funds with 35-65% equity, LTCG applies after 24 months, taxed at 12.5% without indexation (post Budget 2024). For specified mutual funds (less than 35% equity), there is no LTCG concept — gains are always taxed at slab rate. The indexation benefit that was available for debt funds has been completely removed for all asset classes from July 23, 2024.
In Simple Words
The July 2024 Budget was a watershed moment for mutual fund taxation. Three big changes happened simultaneously. First, equity LTCG tax went up from 10% to 12.5% under Section 112A. Second, the exemption limit increased from Rs 1 lakh to Rs 1.25 lakh per financial year. Third — and this was the most significant change — indexation benefit was removed across all asset classes (with a limited exception for land/buildings held by resident individuals/HUFs, who have a grandfathering option). Until July 2024, investors holding a non-equity fund for more than the specified period could adjust the purchase cost for inflation using the Cost Inflation Index (CII). This indexation dramatically reduced the taxable gain, especially for long holding periods. Now, that benefit is gone. The rate is a flat 12.5% on actual gains without any inflation adjustment. For equity funds, the practical impact is moderate — the rate went up by 2.5% but the exemption limit also went up by Rs 25,000. For someone with exactly Rs 1.25 lakh in equity LTCG, the tax is zero. For gains above that, the extra 2.5% means slightly more tax. But for non-equity funds (those with 35-65% equity that still qualify for LTCG), the removal of indexation is a major negative. An investor holding a conservative hybrid fund for 5 years earlier could use indexation to significantly reduce the taxable amount. Now the investor pays 12.5% on the full actual gain. Budget 2026 made no changes to capital gains tax rates — the existing rules continue for FY 2026-27.
Real-Life Scenario
Anjali invested Rs 10,00,000 in two funds on April 1, 2022. She redeems both on July 25, 2025 (over 3 years). (1) SBI Bluechip Fund (equity, 97% equity): Redemption value = Rs 16,50,000. Cost = Rs 10,00,000. Gain = Rs 6,50,000. Since held > 12 months, this is equity LTCG. Exemption = Rs 1,25,000. Taxable LTCG = Rs 6,50,000 - Rs 1,25,000 = Rs 5,25,000. Tax = Rs 5,25,000 x 12.5% = Rs 65,625 (plus 4% cess = Rs 2,625). Total tax = Rs 68,250. (2) HDFC Balanced Advantage Fund (assume 55% equity — falls in 35-65% range, non-equity): Redemption value = Rs 13,00,000. Cost = Rs 10,00,000. Gain = Rs 3,00,000. Since held > 24 months and equity is 35-65%, this qualifies for LTCG at 12.5% WITHOUT indexation (post Budget 2024). Tax = Rs 3,00,000 x 12.5% = Rs 37,500 (plus 4% cess = Rs 1,500). Total tax = Rs 39,000. Note: If the HDFC fund had < 35% equity, it would be a specified MF and the entire Rs 3,00,000 gain would be taxed at Anjali's slab rate — potentially Rs 90,000 if she is in the 30% bracket.
Key Points to Remember
Formula
Equity LTCG Calculation (Section 112A): LTCG = Redemption Value - Cost of Acquisition Exempt LTCG = Rs 1,25,000 per financial year Taxable LTCG = LTCG - Rs 1,25,000 (if positive) Tax = Taxable LTCG x 12.5% Non-Equity LTCG (35-65% equity, Section 112): LTCG = Redemption Value - Cost of Acquisition (NO indexation post July 2024) Tax = LTCG x 12.5% Grandfathering (for equity units bought before Feb 1, 2018): Cost of Acquisition = Higher of (Actual Purchase Price, NAV on Jan 31, 2018) But NOT exceeding the Redemption Value
Numerical Example
Example 1 — Equity LTCG with exemption: Vikram bought 10,000 units of an equity fund at NAV Rs 100 on April 1, 2023 (cost = Rs 10,00,000). He redeems all on May 15, 2025 at NAV Rs 145 (value = Rs 14,50,000). LTCG = Rs 14,50,000 - Rs 10,00,000 = Rs 4,50,000 Exemption = Rs 1,25,000 Taxable LTCG = Rs 4,50,000 - Rs 1,25,000 = Rs 3,25,000 Tax = Rs 3,25,000 x 12.5% = Rs 40,625 Cess = Rs 40,625 x 4% = Rs 1,625 Total tax = Rs 42,250 Effective tax on total gain = Rs 42,250 / Rs 4,50,000 = 9.39% Example 2 — Grandfathering benefit: Sheela bought 5,000 units of an equity fund at NAV Rs 80 on Dec 1, 2017 (cost = Rs 4,00,000). NAV on Jan 31, 2018 = Rs 120. She redeems on Aug 1, 2025 at NAV Rs 200 (value = Rs 10,00,000). Grandfathered cost = Higher of (Rs 80, Rs 120) = Rs 120 per unit = Rs 6,00,000 LTCG = Rs 10,00,000 - Rs 6,00,000 = Rs 4,00,000 Without grandfathering: LTCG would have been Rs 10,00,000 - Rs 4,00,000 = Rs 6,00,000 Saving = Rs 2,00,000 x 12.5% = Rs 25,000 in tax
Frequently Asked Questions
Test Your Knowledge
4 questions to check your understanding
Post July 2024 Budget, the rate of LTCG tax on equity-oriented mutual funds is:
Summary Notes
Equity LTCG (>= 12 months): 12.5% on gains above Rs 1.25 lakh per year (Section 112A)
Non-equity LTCG (35-65% equity, >= 24 months): 12.5% without indexation (Section 112)
Specified MFs (< 35% equity): NO LTCG — always slab rate regardless of holding
Indexation removed for ALL asset classes from July 2024 — flat 12.5% on actual gains
Grandfathering still applies for equity units bought before Feb 1, 2018 — cost = higher of purchase price or NAV on Jan 31, 2018