Tax on long-term capital gains during sabbatical

I’ve taken a two-year leave of absence from my job to travel and indulge in my interests. My revenue from mutual fund redemptions last year was ₹5.1 lakh; all of these were long-term holdings. The approximate long term capital gain was ₹2 lakh. Is there going to be any tax due this year, and if so, how will it be calculated?

—Name withheld on request

Congrats firstly on your sabbatical. As I understand, you had a gain of ₹2 lakh in the nature of long-term capital gains last year from mutual fund redemptions. 

If this gain is from non-equity funds (viz. debt funds, liquid funds, etc.) then the income irrespective of long/ short would be at the slab rate.

For example, if you are in a 5% tax slab you’ll pay: 

1. 200,000 X 5% = ₹10,000, 
2. If your slab rate is 20%, 200,000 X 20% = ₹40,000, 
3. If your slab rate is 30%, 200,000 X 30% = ₹60,000.

That is, considering the fact that you don’t have any other income presumably, there might not be any tax implications, as your capital gain can be adjusted with Basic Exemption limit of ₹250,000.

Conversely if these are equity funds, then there is a ₹100,000 capital gain exemption that would be applicable for last year which would make your taxable income only around ₹100,000. If you have any other income during the previous year and utilized the basic exemption of ₹250,000 you’ll have to pay 10% LTCG tax which is around (100,000 X 10%) or ₹10,000, for the ₹100,000 capital gain you have. If not, in both these situations there would not be any tax liability that you would incur assuming again that you have no other income.

Despite this, we would recommend you to file your taxes even though the date has passed. 

Budget changes

Lastly, you need to keep in mind that rules have changed in the recent budget which makes your tax liability for equity funds at 12.5% for long term i.e. 1 year.

The ₹100,000 exemption has also been increased to ₹125,000 henceforth. In case you hold debt funds that have been purchased before 31 March 2023, you would be liable to a 12.5% tax if held for more than 2 years. This makes it attractive to hold on considering that incremental returns are also taxed at 12.5% unlike normal returns and with a view of declining interest rates, there could be some capital gains as well.

Vivek Banka is co-founder of GoalTeller.