Save Capital Gains Tax on STCG and LTCG [VIDEO]

You can Save Capital Gains Tax on LTCG (Long Term Capital Gains) by booking profits of max limit allowed (Rs. 1.25 lakh) and reinvesting the amount every financial year. This is called tax harvesting to reduce or save income tax on gains you make from equity mutual funds. STCG tax rate is 20% where as LTCG tax rate is 12.5% on profits you make in a financial year.

Let us understand how to Save Capital Gains Tax on STCG and LTCG in detail.

Table of Contents

Save Capital Gains Tax Video
What is Capital Gains?
Types of Capital Gains
Tax rates on Capital Gains
How to Save Capital Gains Tax
Conclusion
Frequently Asked Questions

Save Capital Gains Tax Video

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What is Capital Gains?

Capital gains are profits you make when you sell equity mutual funds
Only profits are considered as capital gains, and not the investment amount.
You invest in mutual funds to achieve specific financial goal. Once that goal is achieved, you redeem the units of mutual funds which will help you to gain extra profits or capital gains
It depends on the tenure of holding the mutual fund units – how the profits will be taxed

Let us understand the types of capital gains before understanding taxation on them.

Types of Capital Gains

There are 2 types of capital gains while selling equity mutual funds
STCG – Short Term Capital Gains
LTCG – Long Term Capital Gains
STCG are the profits or capital gains you make after holding the mutual fund for less than 1 year. So if you make profits after selling mutual funds within 1 year of buying them, the profits will be called Short term capital gains or simply STCG
LTCG are the profits you make after selling mutual funds with holding period of more than 1 year. Since the tenure is more than 1 year, they are called long term capital gains or simply LTCG

The tax rates applied on both capital gains are different, so let us now understand the tax rates on STCG and LTCG.

Tax rates on Capital Gains

STCG tax rate is 20% on profits you make via mutual funds
This means, if your total investment is Rs. 1 lakh and after selling mutual funds within 1 year, the amount is Rs. 1.5 lakh, than you need to pay 20% STCG tax on Rs. 50,000 profits or capital gains.
No tax is to be paid on principal amount you had invested
LTCG tax rate is 12.5% on profits made above Rs. 1.25 lakh in a financial year
This means if your total investment is Rs. 1 lakh and after 1 year you sell mutual funds for Rs. 2.2 lakh – profit of Rs. 1.2 lakh. In this case since the profit is within Rs. 1.25 lakh in a financial year, you don’t have to pay any tax on this
However, if your profit is 1.3 lakh in above scenario, than 12.5% tax need to be paid on profit above Rs. 1.25 lakh – that is 12.5% tax on Rs. 5000

ALSO READ: Income Tax on SIP

How to Save Capital Gains Tax

Let us understand how you can save income tax on capital gains made via short term or long term

Saving STCG Tax

As seen above, STCG tax rate is 20% and there is no exemption in profits. Hence 20% tax need to be paid if you make capital gains or profits in short term.
One way to save STCG is when your income is below basic exemption limit of Rs. 2.5 lakh. If total income in financial year is below Rs. 2.5 lakh, you don’t need to pay income tax since you fall under 0% tax bracket
Also, you can make use of Tax Rebate under Section 87A to save STCG tax

Saving LTCG Tax

The fact that Rs. 1.25 lakh in a financial year will not be taxed under LTCG taxation calculation can be used to save income tax on long term gains
Every year, you get this exemption of first Rs. 1.25 lakh which can be used to redeem the mutual fund units.
For example, you can sell those mutual fund units which you are already holding for more than a year, in such a way that your total profit is within Rs. 1.25 Lakh. This is called Tax Harvesting
Once you redeem them, you reinvest the total amount again so that you show those profits as deposit or principal amount that you invested again
Repeat this procedure every financial year to reduce or save income tax on gains over long term

Watch below video to understand this procedure with examples of SIP

Income Tax on SIP Video

Watch more Excel Videos Here

Conclusion

So you can Save Capital Gains Tax on equity mutual funds with the help of tax harvesting. Which means, you redeem the profits allowed as exemption limit every year, that is Rs. 1.25 Lakh and reinvest this profit amount with principal amount as well. This tax harvesting works only with LTCG (long term capital gains), since STCG does not have such exemption limit to save income tax.

It is encouraged to hold the mutual fund units or stocks over long term to avoid tax to be paid in short term.

Some more Reading:

Frequently Asked Questions

Is there any way to save capital gain tax?

yes you can Save capital gains tax with the help of tax harvesting. In this process, you redeem the mutual funds units that will make you profits within exemption limit of Rs. 1.25 lakh over long term holding period of more than a year.

How can I reduce capital gains tax?

You can reduce the capital gains tax by holding the equity mutual funds over long term, since long term capital gains tax is less compared to short term capital gains. Apart from this, with LTCG you can use tax harvesting process to reduce your tax amount over long term.

How much capital gain is tax free?

Rs. 1.25 lakh of capital gains or profits is tax free in financial year for equity mutual funds. Above Rs. 1.25 lakh, you need to pay 12.5% tax on profits made over long term as LTCG tax.

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