InvestorQ : Can you explain how the treatment of capital gains is different in case of equity funds and direct equities?
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Can you explain how the treatment of capital gains is different in case of equity funds and direct equities?

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2 years ago
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In case of capital gains the treatment of capital gains on equity and equity funds is exactly the same. The following 2 rules are applied both in case of equity funds and direct equities:

If the shares or equity funds are held for less than 1 year then it is classified as short term capital gain (STCG). The concessional rate of 15% STCG tax will be applied in the case of equities and equity funds if held for less than 1 year.

If the shares or equity funds are held for more than 1 year then it is classified as long term capital gains (LTCG). The LTCG was tax-free both in the case of direct equities and in case of equity mutual funds till March 2018. However, from April 2018 onwards, the long term capital gains (LTCG) on equities and equity funds are taxed at the rate of 10% above Rs.1 lakh of such LTCG on equities per year. So your total LTCG from equities and equity funds will be clubbed and will be exempt up to Rs.1 lakh per annum.

When the 10% tax on equities and equity funds was introduced in the Union Budget 2018, it was structured as a flat tax. That means there will be no benefit of indexation available on these long term capital gains. Even if it is held for 20 years, any LTCG above Rs.1 lakh will still be taxed. This rule will apply to direct equities and to equity funds too.

There is an important thing to remember. For a fund to qualify as an equity fund, it must have an exposure of minimum 65% to equities. If the holding falls below that mark then it will be treated as a non-equity fund and will lose out on the above tax benefits.

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