⁠How To Plan Taxes On Mutual Fund Capital Gains Before March

Many investors wait until the last minute to calculate taxes on their mutual fund gains, forcing hurried withdrawals and rushed decisions as March 31 approaches. But there is no harm in planning. With a few months still left before this financial year ends, reviewing your mutual fund capital gains now can help you avoid unnecessary stress later. Since tax on mutual fund gains depends upon the type of fund and how long you have held it, advance planning enables you to time your withdrawals or switches efficiently, and even lower your tax liability.

Many investors wait until the last minute to calculate taxes on their mutual fund gains, forcing hurried withdrawals and rushed decisions as March 31 approaches. But there is no harm in planning. With a few months still left before this financial year ends, reviewing your mutual fund capital gains now can help you avoid unnecessary stress later. Since tax on mutual fund gains depends upon the type of fund and how long you have held it, advance planning enables you to time your withdrawals or switches efficiently, and even lower your tax liability.

For taxation purposes, mutual funds are broadly classified into equity-oriented and debt-oriented schemes.

Equity Mutual Funds

For equity mutual funds, capital gains are divided into either short-term or long-term, depending on the period of holding of the units. If the units are sold within one year from the date of purchase, the gains are said to be short-term capital gains (STCG) and taxed at 20% plus cess. If the units are sold after completing one year, the gains are long-term capital gains (LTCG), which attract a tax of 12.5%. In one financial year, LTCG up to Rs 1.25 lakh is exempt, which means tax is payable only if the gains are above that threshold.

Debt Mutual Funds

In the case of debt mutual funds, taxation is based on the purchase date of the units. If these were bought before April 1, 2023, the gains shall be taxed based on the holding period. Units held for two years or more are considered long-term capital gains and are taxed at 12.5% without indexation, while units sold before two years attract short-term capital gains, to be taxed according to the income tax slab of the investor. In the case of units acquired on or after April 1, 2023, all gains are considered as short-term capital gains under Section 50AA and taxed accordingly as per the individual taxpayer's slab rate.

Planning capital gains ahead of March allows investors to:

• Reduce tax by spreading redemptions over two financial years.

• Use the Rs 1.25 lakh tax-free LTCG limit on equity funds.

• Avoid unintentionally triggering short-term gains from last-minute selling.

• If there is a considerable gain in equity, redeeming the units before March 31 will help utilise the tax-free limit in the current year and avoid spilling over the gains into the next financial year.

Use the Rs 1.25 lakh LTCG exemption every year: Investors can plan withdrawals so that gains up to Rs 1.25 lakh in a financial year remain tax-free. Instead of taking out a large amount at the end of March, withdrawals can be split across two financial years, for instance, February and April, to minimise tax.

Review short-term holdings: Selling equity funds before one year of purchase results in STCG at 20%. If the holding period is close to 12 months, waiting a little longer may reduce tax. By reviewing gains now instead of waiting until March, investors can strategically redeem or switch units in a tax-efficient manner, and ensure that tax planning works in their favour.