How long term capital gains of 10% taxed on Stocks and Mutual Funds from 2018?

How long term capital gains o taxed on Stocks and Mutual Funds from 2018-minHow long term capital gains of 10% taxed on Stocks and Mutual Funds from 2018? – Updated 6-Feb-2018


After Mr.Arun Jaitley’s announcement of Long Term Capital Gains (LTCG) on Stocks and Mutual Funds, stock markets crashed by almost 900 points on last Friday. Till now, LTCG is tax free on stocks and equity mutual funds. Now as per budget 2018 announcement, there is tax component on long term capital gains. The budget announcement also created confusion where the computation is different for the stocks or mutual funds purchased till 31st January, 2018 and the ones which are brought fresh from 1st Feburay, 2018. How is long term capital gains taxed on equity stocks and equity mutual funds from 2018? How LTCG computations are different till 31st Jan and from 1st February, 2018? This post is revised on 6th February, 2018 (after post is published) with clarifications received by Govt of India. 

Also Read: Best Sector Funds for 2018 that can give high returns

What is existing Capital Gains Tax on Stocks and Mutual Funds?


Here are the existing guidelines on Capital Gains Taxation till last year.

1) Returns from sale of Equity stocks or Equity Mutual Funds held for < 1 year are short term capital gains – 15% is taxed.

2) Returns from sale of Equity stocks or Equity Mutual Funds held for > 1 year are long term capital gains – Zero Tax on LTCG.

3) Returns from sale of Assets other than stocks or Equity Mutual Funds held for < 3 years are short term capital gains – Taxed based on individual tax in the year which one gets STCG.

4) Returns from sale of Assets other than stocks or Equity Mutual Funds held for > 3 years are long term capital gains – 20% of LTCG is taxed.

What Changed now in 2018?


Just see point no.2 above. Returns from sale of Equity Stocks or Equity Mutual funds after 1 year were tax FREE. Now post budget announcement, there is change in taxation rules for LTCG for stocks and equity mutual funds.

How long term capital gains of 10% taxed on Stocks and Mutual Funds from 2018?


Here are the change in guidelines for taxation of long term capital gains tax on stocks and equity mutual funds from 2018.

1) There is no change in short term capital gains (STCG).

2) There would be 10% tax on long term capital gains from Stocks and Equity Mutual Funds (held for more than 1 year) from April 2018 onwards. Any equity funds or stocks sold by 31st March, 2018, there wold not be any long term capital gain tax. 

3) An investor would get Rs 1 Lakh as exemption from total long term capital gains and balance (if any), one need to pay 10% tax on LTCG.

4) Stocks or Mutual Funds purchased prior to 31st January, 2018, one need to assess the value as on that date (Highest of (a) purchase value (b) value as on 31st January, 2018) to compute capital gains tax.

5) Stocks or Mutual Funds purchased on or after 1st February, 2018, one would already know what is the purchase value and LTCG can be computed accordingly.

Also Read: Top 10 Multibagger Stocks that benefits from Rural Spending announced in budget

How long term capital gains of 10% taxed on Stocks and Mutual Funds from 2018 – Explained with examples


Example 1 – LTCG Taxation on Stocks and Mutual Funds from 2018 which was brought on or prior to 31st January, 2018


Mr.Rajesh purchased Equity Stocks of Rs 1 Lakh on or before 31st July, 2017 (6 months prior to budget announcement date). The value of such stocks are Rs 1.2 Lakhs on 31st January, 2018. The acquisition value (as per finance bill 2018 it is highest of purchase value or deemed value as on acquisition of asset) is Rs 1.2 Lakhs.

a) If Mr.Rajesh sells all his stocks before 31st July, 2018 (< 1 year), short term capital gain of 15% to be paid. Assuming that he sold them at Rs 1.3 Lakhs, STCG is Rs 10,000 (Rs 1.3 Lakhs minus Rs 1.2 Lakhs) and 15% of Rs 10,000 = Rs 1,500 is the STCG Tax.

B) If Mr.Rajesh sells his stocks after 31st July, 2018 (> 1 year), long term capital gain applies. Assuming that he sold them at Rs 1.3 Lakhs, LTCG is Rs 10,000 (Rs 1.3 Lakhs minus Rs 1.2 Lakhs) and if we remove minimum exemption of Rs 1 Lakh, the net LTCG is nil and income tax on LTCG is also nil.

c) If Mr.Rajesh sells his stocks after 31st July, 2018 (> 1 year), long term capital gain applies. Assuming that he sold them at Rs 2.3 Lakhs, gross LTCG is Rs 1.1 Lakhs (Rs 2.3 Lakhs minus Rs 1.2 Lakhs) and if we remove minimum exemption of Rs 1 Lakh, net long term capital gain is Rs 10,000. LTCG Tax @ 10% would come to Rs 1,000.

Example 2 – LTCG Taxation on Stocks and Mutual Funds from 2018 which was brought on on prior to 31st January, 2018


Mr.Mahesh purchased Mutual Funds of Rs 10 Lakh on or before 31st July, 2017 (6 months prior to budget announcement date). The value of such mutual funds are Rs 12 Lakhs on 31st January, 2018. The acquisition value (as per finance bill 2018 it is highest of purchase value or deemed value as on acquisition of asset) is Rs 12 Lakhs.

a) If Mr.Mahesh sells all his mutual funds before 31st July, 2018 (< 1 year), short term capital gain of 15% to be paid. Assuming that he sold them at Rs 13 Lakhs, STCG is Rs 100,000 (Rs 13 Lakhs minus Rs 12 Lakhs) and 15% of Rs 100,000 = Rs 15,000 is the STCG Tax.

B) If Mr.Mahesh sells them after 31st July, 2018 (> 1 year), long term capital gain applies. Assuming that he sold them at Rs 13 Lakhs, LTCG is Rs 100,000 (Rs 13 Lakhs minus Rs 12 Lakhs) and if we remove minimum exemption of Rs 1 Lakh, LTCG is nil and tax on LTCG is also nil.

c) If Mr.Mahesh sells this after 31st July, 2018 (> 1 year), long term capital gain applies. Assuming that he sold them at Rs 23 Lakhs, LTCG is Rs 11 Lakhs (Rs 23 Lakhs minus Rs 12 Lakhs) and if we remove minimum exemption of Rs 1 Lakh, long term capital gain is Rs 10 Lakhs. LTCG Tax @ 10% would come to Rs 1 Lakh.

Example 3 – LTCG Taxation on Stocks and Mutual Funds from 2018 which was brought on on after 1st February, 2018


Mr.Kishore purchased Equity Mutual Funds of Rs 5 Lakh on or after 1st February, 2018 (post budget announcement date). The acquisition value would not change as these are after the cut-off date of 1st February, 2018.

a) If Mr.Kishore sells this before 1st February, 2019 (< 1 year), short term capital gain of 15% to be paid. Assuming that he sold them at Rs 6 Lakhs, STCG is Rs 1 Lakh and STCG Tax @ 15% of Rs 1 Lakh = Rs 15,000.

B) If Mr.Kishore sells his mutual funds after 1st February, 2019 (> 1 year), long term capital gain applies. Assuming that he sold them at Rs 8 Lakhs, Gross LTCG is Rs 3 Lakhs and if we remove minimum exemption of Rs 1 Lakh, net LTCG would be Rs 2 Lakhs. LTCG tax is 10% @ Rs 2 Lakhs = Rs 20,000.

Example 4 – LTCG Taxation on Stocks and Mutual Funds from 2018 which was brought on on after 1st February, 2018


Mr.Bala purchased Equity Mutual Funds of Rs 20 Lakh on or after 1st February, 2018 (post budget announcement date). The acquisition value would not change as these are after the cut-off date of 1st February, 2018.

a) If Mr.Bala sells this before 1st February, 2019 (< 1 year), short term capital gain of 15% to be paid. Assuming that he sold them at Rs 25 Lakhs, STCG is Rs 5 Lakhs and STCG tax of 15% @ Rs 5 Lakhs = Rs 75,000.

B) If Mr.Bala sells his mutual funds after 1st February, 2019 (> 1 year), long term capital gain applies. Assuming that he sold them at Rs 30 Lakhs, Gross LTCG is Rs 10 Lakhs and if we remove minimum exemption of Rs 1 Lakh, net LTCG would be Rs 9 Lakhs. LTCG tax is 10% @ Rs 9 Lakhs = Rs 90,000.

Example 5 – LTCG Taxation on Stocks and Mutual Funds from 2018 which was brought before and sold after 1st February, 2018


Mr.Vijay purchased Equity Mutual Funds of Rs 10 Lakh on 1st February, 2015. The value of such funds are Rs 12 Lakhs as on 31st January, 2018.

a) If Mr.Bala sells them between 1st February, 2018 and 31st March, 2018, these would fall under long term capital gains (> 1 year) and since it is before 31st March, 2018, these are tax free.

B) Mr.Bala sells his mutual funds after 1st April, 2018 and the value is Rs 14 Lakhs. Since he sold after 1st April, 2018, gross long term capital gain is Rs 2 Lakhs (Rs 14 Lakhs minus Rs 12 Lakhs of base price). Net long term capital gain is Rs 1 Lakh (Rs 2 Lakhs minus Rs 1 lakh standard deduction on LTCG). LTCG tax is 10% @ Rs 1 Lakh = Rs 10,000.

Does 10% long term capital gains are taxed for all Stocks and Mutual Funds from 2018?


Long Term Capital Gains Tax @ 10% is applicable for the following:

1) Applies to all Equity Stocks which an investor has purchased / holding as on 1st April, 2018 and sold after this date. Any stocks sold before 1st April, 2018, these are any ways exempted.

2) Applies to all Equity Mutual Funds which an investor has purchased / holding as on 1st April, 2018. If you have sold your equity mutual funds before this date, these are any ways tax free.

What does this LTCG Tax on equity mean to investors?


Simple message. Lower your expectation on returns. Earlier I used to keep indicating that one can expect 12% to 15% annualized returns on mutual funds. Now my message should be that one can expect 10% to 13% annualized returns.

How can we avoid or reduce LTCG Tax of 10% on Equity Stocks or Equity Mutual Funds?


While you can go ahead and book the profits before 31st March, 2018 to avoid tax, there are couple of ways where you can avoid or reduce LTCG of 10% in future. 

1) Book profit every year (> 1 year holding) upto Rs 1 Lakh exemption provided


As per budget they have announced Rs 1 Lakhs exemption on LTCG on Equity Stocks and Mutual Funds per year. Hence you can go ahead and book upto Rs 1 Lakh profit every year (> 1 year holdings) and get tax benefit. E.g. Mr.Akhil has invested in Stocks for Rs 10 Lakhs on 1st February, 2018. Between 1st February, 2019 to 31st March, 2019 (before financial year closure) if the value of his stocks are Rs 11 Lakh, he can go ahead and book the profit and again purchase the same stocks. Since he booked the profit, it would come under Rs 1 Lakh exemption and no LTCG tax to be paid. He is still holding his stock, hence from personal front, there is no issue about investments.

2) Invest for long term of 10 to 15 years


One can invest for long term of 10 to 15 years. Since you are investing for long term, the tax amount would be very small. E.g. if you are getting 13% annualised returns, your net returns coule be 11.7% after taxation.

3) Invest in diversified portfolio within Stocks or Mutual Funds


Like I indicated earlier, don’t put all your investments in one class of funds or stocks. Invest in variety of stocks or mutual funds. Invest in large cap, midcap or balanced funds. Invest in stocks that benefit from rural Sector or IT Sector or Auto Sector. These tend to perform well across various market cycles. When you want to book profits, you can book profits which are running good during that time. This way if you are paying 10% LTCG you may not see big difference.  

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Suresh

How long term capital gains of 10% taxed on Stocks and Mutual Funds from 2018

42 comments

  • Kishore

    I’m Kishore from Example 3 😉

    NICE POST.

  • Joseph Mathew

    Hi Suresh,

    Got a confusion regarding the STCG Tax , if we sell out equity mf before holding one year, is the AMC will deduct the STCG Tax from us and redeem the balance  or we need to file tax after calculating the short term capital gains with our tax returns?

  • Sivaraman

    Will long term capital Loss be considered for tax deduction?

  • Shruti Paranjpe

    Thank you for this post. You have explained everything in such simple language that even amateur investors like me will be able to understand. Thanks once again.

    • Thank you Shruti, There were clarifications given by Govt of India now continuing tax exemption till 31st March, 2018. Any equity stocks or mutual funds sold after 31st March, 2018, the new guidelines of 10% on LTCG would apply. Pls read the updated article

  • Sat Paul Goyal

    Hi Suresh Sir, 

    Thanks for quite informative article. Hope booking long term capital gains upto Rs 1 lac every year will be advantageous over paying 10% LTCG after 15 years period. Isn't pl ? Paying 10% LTCG after 15 years can erode a large corpus as maturity amount at redemption can be quite huge due to compounding. 

    Secondly, how do we calculate LTCG in case we are investing through Sip each week or month as each sip is a fresh investment. Kindly explain the process to work it out.

    Thanks !!

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