LTCG tax on Mutual Funds: Have short-term investment goals? MUST KNOW THIS

Mutual fund investment accrues Long Term Capital Gain (LTCG) Tax if the investment is in equity.

Long term capital gains from debt scheme is taxed at 20 per cent with the benefit of indexation and hence, it's more tax-efficient compared to fixed deposits. Photo: Reuters

Mutual fund investment accrues Long Term Capital Gains (LTCG) Tax if the investment is in equity mutual funds. To avoid income tax, people prefer to buy ELSS mutual funds but it has a three year lock-in period that leads LTCG Tax on your income. According to the tax and investment experts, if you have invested in equity mutual funds, you will have to pay LTCG Tax if you mature your investments after one year. However, if your investment is in debt funds, then your investment is liable for LTCG Tax if the investment is for three years or above. So, if someone has a short-term investment goal, he or she needs to go for the debt funds and prolong the LTCG Tax from one year to three years.

Speaking on the LTCG Tax norms in mutual funds Jitendra Solanki, a SEBI registered tax and investment expert said, "LTCG Tax is levied on equity mutual funds if it is for one year or beyond. However, if the investor has invested in debt funds, then the LTCG Tax becomes applicable to investment that is for three years or above." He said that for short-term investment goals, people invest in hybrid funds or debt funds that also give returns to the tune of near 8 per cent. However, if the fund manager is matured enough and the stock market has performed better, then it can give around 1 to 1.5 per cent more. However, hybrid funds qualify for the LTCG Tax after one year and hence it's better to invest in debt-fund and try to avoid LTCG Tax on one's investment.

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Elaborating upon the LTCG Tax and how debt funds can help you prolong LTCG Tax from one year to three years Pankaj Mathpal, Managing Director, Optima Money Managers said, "Debt provides stability to the portfolio. Holding a period of more than 3 years qualifies for long term capital gain. Long term capital gain from debt scheme is taxed at 20 per cent with the benefit of indexation and hence, its more tax-efficient compared to fixed deposits."

Asked about a debt mutual fund that can be invested in, Pankaj recommended Nippon India Nivesh Lakshya Fund citing, "Scheme was introduced in July 2018 and it has delivered 20.29% returns in one year. The scheme has major exposure in Government Securities and Central Government loans with a long maturity. There is no credit risk or default risk in the scheme as there is a sovereign guarantee."

SEBI registered tax and investment expert Manikaran Singhal said that mutual fund investors can think of Franklin Short-term Fund and HDFC Short-term Fund as the two debt funds are expected to give around 1 to 1.5 per cent higher than the Bank Fixed Deposit (FD).

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