Do I need to pay tax on equity fund gains?

Let's understand by using the principles of the new tax regime

The answer depends on the holding period and your annual income.

Let's tackle the holding period first.

• If you have held the equity-oriented fund for less than 12 months, you must pay a 15 per cent tax (short-term capital gains tax).
• If you have held the fund for over a year, you don't have to pay any tax unless your gains are over Rs 1 lakh. In that case, you will need to consider your annual income, so we have listed five scenarios to explain how you will be taxed under the new regime.

Scenario 1

In this case, you pay ZERO tax.

Why? Because under the new tax regime, any income (including gains from mutual funds) under Rs 3 lakh is not taxable.

• Regular income: Nil
• Gains made from equity mutual funds: Rs 2.5 lakh

 Scenario 2 (For those whose income other than mutual fund gains is below Rs 3 lakh in the new tax regime)

• Annual income: Rs 2 lakh
• Gains made from equity mutual funds: Rs 2.5 lakh
• But let's make it Rs 1.5 lakh (Remember, Rs 1 lakh gains made on mutual funds are exempt from tax)

Before we calculate the total annual income, let's first inform you that income up to Rs 3 lakh attracts zero tax in the new regime. (So, a person earning Rs 25,000 per month and below has no tax obligation).

Now that we have this information, let's calculate your total annual income:

Annual income (Rs 2 lakh) + Fund gains (Rs 1.5 lakh, see the third bullet point) = Rs 3.5 lakh.

This means you have earned Rs 50,000 above the non-taxable limit.

As a result, you'll have to pay a 10 per cent tax on the Rs 50,000, which comes to Rs 5,000.

Scenario 3 (For those whose income other than mutual fund gains falls between Rs 3 - 7 lakh)

• Annual income: Rs 4 lakh
• Gains made from equity mutual funds: Rs 2.5 lakh
• But let's make it Rs 1.5 lakh (Remember, Rs 1 lakh gains made on mutual funds are exempt from tax) 

While all conditions remain the same from the previous scenario, there is a subtle difference.

Notice the annual income of Rs 4 lakh. This is above the non-taxable limit of Rs 3 lakh under the new regime.

However, in this case, too, you won't have to pay any tax.

Why? Because there's this technicality in our tax system that excuses all persons earning less than Rs 7 lakh per year from paying any tax.

But remember that this only applies to your annual income and does not include capital gains from any investment.

• You pay zero tax because your income is below the Rs 7 lakh limit.
• However, your mutual fund gains are Rs 1.5 lakh (see the third bullet point), which will be taxed at 10 per cent.

 Scenario 4 (For those whose income is below Rs 7 lakh under the new tax regime but exceeds this limit when you include mutual fund gains)

• Annual income: Rs 6 lakh
• Gains made from equity mutual funds: Rs 2.5 lakh
• But let's make it Rs 1.5 lakh (Remember, Rs 1 lakh gains made on mutual funds are exempt from tax)

At this point, you may ask what's different between the previous case and this one?

If you look closely, you'd realise that in the previous case, the total income including the fund gains fell below Rs 7 lakh - the figure below which you don't need to pay any tax on your annual income.

However, the total income in this scenario exceeds the Rs 7 lakh mark.

(You can figure this out by adding the annual income of Rs 6 lakh and gains made from mutual funds, which is Rs 1.5 lakh).

It means you will have to pay tax on both your annual income and fund gains.

Therefore, this is how your tax will be calculated:

Your Rs 6 lakh annual income will have a tax liability of Rs 15,000. This is based on the income tax slabs under the new tax regime.

Then, your mutual fund gains of Rs 1.5 lakh (see the third bullet point) will be taxed at 10 per cent, which comes to Rs 15,000.

So, your total tax, in this case, will be Rs 30,000.

Scenario 5 (For those whose income without including mutual fund gains is above Rs 7 lakh)

• Annual income: Rs 10 lakh
• Gains made from equity mutual funds: Rs 2.5 lakh
• But let's make it Rs 1.5 lakh (Remember, Rs 1 lakh gains made on mutual funds are exempt from tax)

This case is identical to Scenario 4.

Here, the tax on your annual income of Rs 10 lakh will be Rs 60,000 (based on income tax slabs under the new tax regime).

In addition, the Rs 1.5 lakh fund gains (see third bullet point) will be taxed at 10 per cent, which comes to Rs 15,000. Hence, your total tax liability will be Rs 75,000.