Capital Gains

Short‑term capital gains (STCG) arise when mutual fund units are sold before the statutory holding period expires. For equity‑oriented schemes the holding period is 12 months, while for debt‑oriented schemes it is 36 months. Hybrid schemes follow the rule of the dominant asset class.

Long‑term capital gains (LTCG) are realised when the units are held beyond the respective holding periods. The classification determines the tax rate, eligibility for indexation, and the exemption limits applicable under the Income Tax Act.

For the NISM exam, remember that the holding period is measured from the date of allotment (or purchase) to the date of redemption, not the date of first receipt of dividend. Mis‑reading this can lead to wrong tax rate selection.

• Equity‑oriented MF: 12‑month threshold
• Debt‑oriented MF: 36‑month threshold

For equity‑oriented mutual funds, STCG is taxed at a flat 15% irrespective of the investor’s income slab. LTCG exceeding the annual exemption of ₹1 lakh is taxed at 10% without the benefit of indexation.

Debt‑oriented funds attract a higher tax regime. STCG is added to the investor’s total income and taxed at the applicable slab rates (effectively up to 30%). LTCG, however, enjoys a concessional 20% rate with the benefit of indexation, which adjusts the cost of acquisition for inflation.

Hybrid funds are taxed based on the proportion of equity and debt holdings. The exam may present a hybrid fund with a 65% equity exposure; treat the equity portion as per equity rules and the debt portion as per debt rules.

Indexation adjusts the original cost of acquisition for inflation using the Cost Inflation Index (CII) published by the Indian government each financial year. The higher the CII, the lower the taxable gain, because the indexed cost becomes larger.

The formula is straightforward: multiply the purchase cost by the ratio of the CII of the sale year to the CII of the purchase year. This method is mandatory for LTCG on debt‑or‑equity hybrid funds where the debt component exceeds the equity threshold.

Exam candidates should memorize the latest CII values (e.g., FY 2023‑24 = 348) and know how to retrieve historic values from the Income Tax website if required.

All capital gains must be disclosed in the Income Tax Return (ITR) under Schedule CG. The investor reports separate figures for STCG and LTCG, applying the correct tax rates and exemptions.

TDS is deducted at source only on STCG of equity funds (15%) and on interest distributions of debt funds (10%). No TDS is deducted on LTCG, so the investor must self‑assess the tax liability.

Form 26AS reflects any TDS deducted. The distributor should guide the investor to verify this form and reconcile the amounts before filing the ITR.

Distributors must provide accurate, non‑personalised tax information to investors. This includes explaining the difference between STCG and LTCG, the applicable tax rates, and the importance of the ₹1 Lakh LTCG exemption for equity funds.

While distributors can discuss tax implications, they must not give specific tax planning advice that would be considered personal financial advice, as that requires a registered tax practitioner.

Regulatory guidance (SEBI (Mutual Funds) Regulations) mandates that distributors disclose any material tax-related information in the scheme’s Key Information Memorandum (KIM) and during client interactions.

The financial year in India runs from 1 April to 31 March. Capital gains arising in a FY must be reported in the ITR filed by the due date (typically 31 July for individuals).

If the LTCG exceeds the exemption limit, the taxpayer must pay advance tax in installments as per the Income Tax Act, otherwise interest may be levied under Section 234B.

Distributors should remind investors to retain transaction statements and Form 26AS records for at least six years, as the Income Tax Department may request these during assessments.