Tax Talk

I am in the 30 per cent tax bracket. I made a profit of ₹.1.5 lakh in July this year by selling some of my mutual fund units. I was holding them for more than a year. Can I avoid taxes on LTCG by investing in a property or bonds such as NHAI (National Highways Authority of India)? Are there any other means of avoiding taxes on MF profits? If I had held the MF units for less than a year, how can I avoid paying taxes for short-term capital gain?

Lakshmi

As per the provisions of the Income Tax Act, capital gains arising from sale of units of an equity-oriented fund which are held for more than a year are termed long-term capital gains (LTCG) and are exempt from tax up to ₹1 lakh. LTCG exceeding ₹1 lakh is taxed at 10 per cent (without adjusting for any cost inflation).

LTCG accruing on sale of units of equity-oriented mutual funds till January 31, 2018 has been grandfathered — no capital gain tax shall arise on the accretion in the value of investment till January 31, 2018. (So while computing your capital gains, the cost of acquisition shall be considered to be the fair market value of such units as on January 31, 2018, or the actual cost, whichever is higher).

Capital gains arising from sale of units of a non-equity-oriented fund, which are held for not more than three years, are termed short-term capital gain and is taxable at the tax slab rate applicable to your taxable income.

In case of LTCG, you may claim an exemption for investment in property if you invest the sale proceeds of the mutual fund units to purchase a new house within a period of one year before or two years from the sale of the units, or construct a new house property within three years from the sale of the units.

In such a case, to claim an exemption, it is important that you do not own more than one house other than the new property and comply with other conditions, as prescribed.

No exemption is available for investment in NHAI bonds against LTCG on sale of mutual fund units. Also, no exemption is available for short-term capital gains arising from sale of mutual fund units.

Could you clarify how to calculate the cost of investment made in a mutual fund and the value when withdrawing from the mutual fund?

Thiru

As per the provisions of the I-T Act, the cost of acquisition of assets (units of mutual fund in your case) shall be the purchase price/NAV (net asset value) of the units and any incidental charges (including entry load), if any, paid/attributable for the purchase of such units. Further, the price of investment at the time of redemption of the mutual fund units shall be the sale price/NAV at the time of sale as reduced by any incidental charges (including exit load), if any, paid/attributable for the redemption of such units.

The writer is a practising chartered accountant. Send your queries to taxtalk@thehindu.co.in

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