InvestorQ : How long-term gains and short-term gains are calculated in case of debt fund investments?
Mahima Roy made post

How long-term gains and short-term gains are calculated in case of debt fund investments?

Aditi Sharma answered.
2 years ago

Unlike equity funds, where the share of equity exposure is more than 65%, all other categories of fund are purely classified as non-equity funds and debt funds fall into that category. Compared to equity funds, there is a difference in the definition of short term in terms of tenure also the subsequent treatment of these debt funds. For example, in the case of debt funds, short-term is a holding period of less than 36 months. Long-term holding is a period more than 36 months. (This cut-off was 12 months till the Union Budget 2014 and only post the Union Budget 2014 was the definition of long term on debt funds changed to 36 months).

It may be recollected that short-term capital gains on debt funds (as in the case of any non-equity fund) are taxed at your applicable slab rate. That means; STCG gets added to your total income and depending on which slab of income you are in (20% or 30%), you will be taxed. Since these short term gains on debt funds are automatically added to your total taxable income, the 4% cess will be automatically applicable. However, in case the income of the individual filing the returns is more than Rs.50 lakh or Rs.1 crore for the financial year, then an additional surcharge of 10% and 15% respectively will also be imposed. This changes the effective rate of tax in case of debt funds. For this purpose, the STCG will be considered to be part of total income. In the case of debt funds, long-term capital gains are taxed at 20% of the gain with cost indexation benefits. Indexation is the method by which your cost is adjusted for inflation. What this does is to effectively reduce your absolute gain, as your cost goes up and thus reduces your taxable profit. What we do in indexation is to inflate the cost of acquisition based on the cost inflation index (CII) and then calculated the taxable capital gains on the revised cost. This helps to reduce the taxable capital gains.