# Long Term Capital Gain Tax

As per law, you are required to pay 10% tax on gains from Equity and Balanced funds after 1 year of investment and 20% on gains from debt funds after 3 years of investment. This is called Long term capital gains (LTCG) tax.

Equity funds were generally exempted from any long term capital gains tax but in latest financial budget of 2018, Government has decided to levy flat 10% tax on equity and balanced funds on profit of more than 1 lakh rupees. What this means is whenever you withdraw money from equity mutual funds then you need to pay 10% tax on the profit made after subtracting Rs 1 Lakh. If the profit is under 1 Lakh then there is no tax.

This works differently for debt funds. Lets understand Long term capital gains tax from this example.

Equity/Balanced Funds

Suppose you have invested Rs 1,00,000 in equity mutual fund and after 10 years the value of your investment is Rs 10,00,000. The total profit is of Rs 9,00,000 and thus you would need to pay 10% tax on Rs 8,00,000 (after subtracting rupees 1 Lakh from total profit) which comes to be Rs 80,000.

Debt Funds

Debt funds levy 20% tax on long term gain using indexation methodology. Indexation means rather than paying tax on whole profit amount you only pay for inflation adjusted profit. This will reduce the tax paid by some amount. To adjust your profit , you need to multiply your profit with a factor provided by Income tax department. This factor is calculated as (CII of year of withdrawal/CII of year of investment), where CII is called cost of inflation index. Suppose this factor comes out to be 0.8 and your profit is Rs 1,00,000 then you need to pay tax on 0.8* Rs 1,00,000 = 80,000. Tax paid becomes (20/100)*80,0000 = Rs 16,000 in this case.

For SIP, the tax is again on rolling basis of investment. Only the units which qualify for LTCG tax will be taxed and rest will be taxed for short term gains.

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