Earning returns is one thing. Keeping more of them is where real planning starts.

Investing in mutual funds or stocks isn’t just about selecting the right products. It’s also about understanding how and when to exit—so that taxes don’t quietly erode your gains.

That’s where Capital Gains Tax comes into play.

Whether you’re investing in equity, debt, or hybrid funds, knowing how capital gains are taxed helps you make smarter decisions, avoid surprises, and plan redemptions more efficiently.

Let’s break it down in simple terms.

1. What Is Capital Gains Tax?

A capital gain is the profit you make when you sell an investment for more than you paid for it.

Capital Gains Tax is the tax you pay on that profit.

There are two types:

• Short-Term Capital Gains (STCG) – When you sell within a short holding period

• Long-Term Capital Gains (LTCG) – When you hold for longer before selling

The rates and holding periods vary depending on asset type—equity or debt.

2. Capital Gains Tax on Equity Mutual Funds

✅ What counts as equity?

Funds with 65%+ in Indian equities—including equity mutual funds and ELSS.

📝 Example:

You invested ₹2 lakhs, and after 14 months, it's worth ₹2.5 lakhs

Gain = ₹50,000 → Under ₹1 lakh = No tax

But if gain = ₹1.5 lakhs → ₹50,000 is taxed at 12.5% = ₹6,250

3. Capital Gains Tax on Debt Mutual Funds (Post-April 2023)

✅ Includes all non-equity funds like:

• Liquid funds

• Short/medium/long duration funds

• Corporate bond funds

• International funds

• Gold and FOFs (fund of funds)

📝 This means whether you hold a debt fund for 6 months or 6 years, the gain is added to your income and taxed accordingly.

4. Hybrid Funds: Tax Depends on Composition

Hybrid funds are taxed based on their equity exposure.

• If equity ≥ 65% → Taxed like equity funds

• If equity < 65% → Taxed like debt funds

Examples:

• Aggressive Hybrid Fund → Equity taxation

• Conservative Hybrid Fund → Debt taxation

• Equity Savings Fund → Usually taxed as equity

• Balanced Advantage Fund → Usually taxed as equity (check factsheet)

✅ Always verify classification before redeeming.

5. Capital Gains Tax on SWPs (Systematic Withdrawal Plans)

SWP is not interest income—it’s partial redemption.

Each withdrawal has some principal + some gain. Only the gain portion is taxed, based on holding period and fund type.

This makes SWPs more tax-efficient than FDs, especially for retirees or those drawing regular income.

6. How to Save on Capital Gains Tax

🧠 Plan Redemptions:

• Hold equity funds more than 12 months to qualify for LTCG

• Split large redemptions across multiple financial years to stay under ₹1 lakh LTCG exemption

🧠 Use Loss Harvesting:

• If some funds are at a loss, redeem to offset gains (called "tax-loss harvesting")

🧠 Opt for SWP over lump sum redemptions:

• Reduces tax impact by spreading gains

• Helps manage cash flow more efficiently

7. Don’t Confuse Capital Gains with Dividends

Dividends used to be tax-free in the hands of investors. But now:

• Dividends from mutual funds or stocks are taxed at your income slab

• This makes growth + redemption (capital gains) often more efficient than dividend options

TL;DR — Too Long; Didn’t Read

• Capital gains tax is levied when you sell investments at a profit

• Equity funds:

  • STCG = 20% if sold within 12 months

  • LTCG = 12.5% (after ₹1 lakh exemption) if held >12 months

• Debt funds (post-2023): Gains taxed as income, regardless of holding period

• Hybrid funds’ taxation depends on their equity mix

• Plan redemptions and use SWPs or tax harvesting for efficiency

• Tax planning matters just as much as fund selection