How can I save the long-term capital gain tax on an equity mutual fund?

In this answer, I will explain how you can save up to Rs 10k per year on the Long Term Capital Gain (LTCG) tax for equity mutual fund.

As per current tax rules, there is a 10% tax on LTCG over an above the profit of Rs 1 lakh. An investment is qualified as long term if it is more than 1 year old.

Please note that the key here is “there is no tax on profit up to 1 lakh”.

How can you save tax up to Rs 10k on LTCG?

Let’s say you started a SIP of Rs 20k in Kotak Standard Multicap Fund- Direct-Growth on 1st February 2017. (For simplicity, we are considering only 1 mutual fund)

Monthly SIP: Rs 20,000

Total Installment: 37

Investment Amount: Rs 20,000*37 = Rs 7,40,000

Units Purchased = Sum of units of each month = 21,239.67

NAV as of 17th Feb 2020 = 40.661

Current Value of Investment = Rs 8,63,626

Profit = Rs 1,23,626

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Now, the total profit on Kotak Standard Multicap Fund till date is Rs 1.23 lakh.

However, this profit includes investment till 1st Feb 2020.

Long Term Capital Gain is applicable if your investment completes 1 year. Investment within 1 year would fall under short term capital gain. Hence, we need to consider only the investment till 1st Feb 2019.

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Total Installment till 1st Feb 2019: 25

Investment Amount: Rs 20,000 * 25= Rs 5,00,000

Units Purchased till 1st Feb 2019 = 14,928.34

NAV as of 17th Feb 2020 = 40.661

Current Value of units purchased till 1st Feb 2019 = 14,928.34*40.661 = Rs 6,07,002

Profit = Rs 1,07,002

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Since the units purchased till 1st Feb 2019 qualifies as long term investment, the gain from selling these units would fall under LTCG. It means that if you sell these units, there won’t be any tax till profit of Rs 1 lakh.

As per the above calculation, your LTCG is Rs 1.07 lakh, you can sell 14,928.34 units to save 10% tax on 1 lakh profit.

(In fact, you don’t need to sell 14,928.34 units. You need to sell 14,756 units which would make the profit as 1 lakh.)

You don’t have to pay any tax on the profits till 1 lakh. Hence, you will save Rs 10k. Isn’t it cool?

(If you want to continue with the investment for a specific financial goal, you can reinvest the amount received by buying the same fund at current NAV. In this case, the return would be added to the principle.)

In this way, every year you can save Rs 10k on LTCG. This concept is also known as Tax Harvesting.

Source :Sahil Bhadaviya