Capital gain statement is a document that summarizes your redemption activities and the resulting capital gains or losses on your mutual fund holdings.

It provides crucial information for filing your income tax return accurately.

Volt is partnering up with MFCentral to generate a detailed mutual fund capital gain statement for you.

MFCentral is a unified platform launched in September 2021 to simplify mutual fund investments for individuals in India. It is a collaborative effort between the two leading Transfer Agents (RTAs) in the Indian mutual fund industry, CAMS and KFintech.

It is also a close partner of Volt Money in facilitating effortless LAMF eligibility check and capital gain report generation.

Currently there are mainly three types of mutual funds based on their equity or debt instrument allocation: Equity, Debt and Hybrid.

Taxation of a mutual fund depends on their domestic equity allocation percentage.

Equity Mutual Funds allocate a minimum of 65% of their investable assets to Equity-oriented instruments like domestic Equity shares.

From a tax perspective, Equity Mutual Funds are subject to the same treatment as domestic Equity shares. Short-term capital gains (STCG) at a rate of 15% are applicable to profits from Equity Mutual Fund units held for 12 months or less.

If the holding period exceeds 12 months, capital gains from Equity Mutual Funds are considered Long-term Capital Gains (LTCG). In such cases, the LTCG rate is 10% on cumulative capital gains exceeding Rs. 1 lakh in a financial year.

Debt Mutual Funds must allocate a minimum of 65% of their assets to Debt instruments, including bonds, T-bills, Certificates of Deposits, and similar securities. The tax rates and holding periods applicable to Debt Funds differ significantly from those of Equity Mutual Funds.

From a tax perspective, for investments made before April 1, 2023: STCG is taxed as per your applicable Income Tax slab rate. However, long-term capital gains are taxed at 20% with indexation benefits.

For investments made after April 1, 2023: LTCG and STCG earned on the debt mutual funds are taxable as per your income tax slab.

According to SEBI regulations, Hybrid Funds are allowed to invest in two or more asset classes, including Equity, Debt, Gold, etc. The tax treatment of Hybrid Funds is contingent on equity exposure percentage.

From a tax perspective, for investments made before April 1, 2023: A Hybrid Fund which invests 65% or more of its assets in Equity-oriented investments is taxed like an Equity Mutual Fund. Similarly, if Equity-oriented investments account for less than 65% of a Hybrid Fund’s assets, it is taxed like a Debt Mutual Fund.

For investments made after April 1, 2023: A Hybrid Fund which invests 65% or more of its assets in Equity-oriented investments is taxed like an Equity Mutual Fund. For a hybrid fund with equity proportions exceeding 35% but below 65%, if held for longer than a year are subject to a 20% tax rate and may even be eligible for an indexation benefit. If Equity-oriented investments account for less than 35% of a Hybrid Fund’s assets, it is taxed like a Debt Mutual Fund.

Indexation is a tax benefit that helps adjust for inflation when calculating capital gains tax on certain investments, particularly debt funds(purchased before April 1, 2023) and certain hybrid funds. It essentially acknowledges that the money you gain might not have the same purchasing power due to inflation over time.

• Cost Inflation Index (CII): The government publishes a Cost Inflation Index (CII) every year. This index reflects the average inflation rate in the economy.
• Adjusting Purchase Price: When you sell your investment, the indexation benefit allows you to inflate the original purchase price based on the CIIs of the purchase and sale years.

Here's the formula to calculate the Indexed Cost of Acquisition (ICoA):

Here's an example:

• You invest Rs. 1,00,000 in a debt fund in FY 2018-19 (CII = 264).
• You sell the investment in FY 2023-24 (CII = 321).
• Sale value = Rs. 1,20,000 (Assuming 20% return).

Capital Gain = Sale Value - Purchase Price = Rs. 12,00,000 - Rs. 10,00,000 = Rs. 2,00,000

ICoA = Rs. 1,00,000 * (321 / 264) = Rs. 1,21,59

Indexed Capital Gain = Sale Value - ICoA = Rs. 1,20,000 - Rs. 1,21,59 = Rs. -1,59 (negative gain)

As we can see, indexation reduces the capital gain to a negative value, potentially eliminating your tax liability in this scenario.

The taxation of SIP depends on the type of on the holding period of the units.

The redemption of mutual fund units purchased through SIPs is processed on a first-in-first-out basis. Units bought first will be redeemed first, based on the holding period user will incur long term or short term capital gain.

Tax-saving mutual funds, also known as Equity Linked Savings Schemes (ELSS), are a type of mutual fund that offers investors the benefit of saving taxes along with the potential for growth in the stock market.

ELSS investments qualify for a tax deduction under Section 80C of the Income Tax Act in India. This allows you to deduct up to Rs. 1.5 lakh per financial year from your taxable income for the amount you invest in ELSS.

ELSS funds primarily invest in the stock market, focusing on equities of various companies. This offers the potential for capital appreciation over the long term. ELSS comes with a mandatory lock-in period of 3 years.

ELSS investments qualify for a tax deduction under Section 80C of the Income Tax Act, deduction up to Rs. 1.5 lakh per year from taxable income for the amount invested in ELSS.

ELSS funds come with a mandatory lock-in period of 3 years. As a result, investor cannot generate short-term capital gains (STCG), all capital gains from ELSS are considered long-term capital gains (LTCG). First Rs. 1 lakh of LTCG earned from equity investments, including ELSS funds, in a financial year is exempt from tax.

Before the Union Budget of 2018, there was no LTCG tax on gains from equity investments held for more than one year. To mitigate the impact of introducing LTCG tax, a grandfathering provision was introduced.

Under this provision, the gains accrued up to January 31, 2018 (the day before the budget announcement) were "grandfathered" or exempted from the LTCG tax. The grandfathered value is calculated based on the market value of the investments as of January 31, 2018.

When an investor sells or redeems their equity mutual fund units, the gains are calculated by considering the difference between the actual sale value and the grandfathered value. Gains calculated based on the grandfathering provision are exempt from the LTCG tax. Only the gains accrued after January 31, 2018, are subject to the LTCG tax.

The grandfathering provision is applicable to both equity shares and equity-oriented mutual funds.

Here are some strategies to minimize capital gains tax on mutual funds:

• ELSS (Equity Linked Saving Scheme): As discussed earlier, ELSS offers significant tax benefits with a deduction under Section 80C for investment amount, tax-free LTCG up to Rs. 1 lakh per year, and a lower LTCG tax rate of 10% on gains exceeding Rs. 1 lakh.
• Invest for the Long Term: Equity investments held for over a year qualify for Long-Term Capital Gains (LTCG) with a more favorable tax treatment. The first Rs. 1 lakh of LTCG from equity in a financial year is tax-free, and the remaining LTCG is taxed at a lower rate of 10% compared to the flat 15% for Short-Term Capital Gains (STCG).
• Utilize SIPs: SIPs help average out the cost of your investment over time. This can be beneficial as you may purchase units at different price points. When you redeem your SIP units, some might be in profit (long-term if held for over a year) while others might be at a loss, potentially lowering your overall capital gains tax burden.
• Review your Portfolio Regularly: Regularly assess your mutual fund holdings and consider tax implications when making investment decisions. Look for opportunities to rebalance your portfolio, harvest tax losses, or invest in tax-efficient options like ELSS.