Debt mutual funds are subject to tax on the capital gains earned from them. The tax rate depends on the holding period of the fund units.
Short-Term Capital Gains (STCG)
If you hold the debt fund units for less than 36 months, the capital gains are considered short-term and taxed at your income tax slab rate.
Long-Term Capital Gains (LTCG)
If you hold the debt fund units for more than 36 months, the capital gains are considered long-term and taxed at a flat rate of 20% with indexation. Indexation helps adjust the cost of acquisition to account for inflation.
Calculating Tax on Debt Mutual Funds
Here's how you can calculate the tax on your debt mutual fund investments:
- Step 1: Determine the holding period of your fund units.
- Step 2: Calculate the capital gains by subtracting the purchase price from the selling price.
- Step 3: If the holding period is less than 36 months, tax the capital gains at your income tax slab rate.
- Step 4: If the holding period is more than 36 months, apply indexation to the purchase price and calculate the capital gains. Tax the indexed capital gains at 20%.
Example
Let's say you purchased units of a debt mutual fund for ₹10,000 on January 1, 2020, and sold them for ₹12,000 on January 1, 2023.
- Holding period: 3 years (more than 36 months).
- Capital gain: ₹12,000 - ₹10,000 = ₹2,000.
- Taxable income: After applying indexation, assume the indexed cost of acquisition is ₹11,000. Therefore, the taxable capital gain is ₹12,000 - ₹11,000 = ₹1,000.
- Tax liability: 20% of ₹1,000 = ₹200.
Conclusion
Calculating tax on debt mutual funds is straightforward. You need to determine the holding period and calculate the capital gains based on the applicable tax rates and indexation.
