No Tax on LTCG and STCG from equity mutual funds and shares: 4 situations explained

Investors in equity mutual funds and listed shares frequently encounter capital gains taxes, typically set at 10% for long-term gains exceeding Rs 1 lakh and 15% for short-term gains. However, certain conditions allow these gains to be entirely tax-exempt, particularly benefiting small investors, retirees, and low-income earners. Understanding these exemptions can enable individuals to maximise their returns without the burden of taxation. 

One primary condition for tax exemption is when an individual’s total income, inclusive of capital gains, remains below the basic exemption limit. This threshold varies: Rs 2.5 lakh for individuals under 60, Rs 3 lakh for senior citizens aged 60 to 80, and Rs 5 lakh for super senior citizens over 80. Under Section 111A, short-term capital gains are generally taxed at 15%, while long-term gains under Section 112A are taxed at 10% beyond Rs 1 lakh. However, if the total income does not surpass these limits, no tax is owed on the capital gains. This framework ensures that individuals with low overall income are not penalised for their investment profits. 

Certain transactions involving equities are classified as non-taxable, meaning they do not incur capital gains tax. These include gifts of shares or mutual funds and transfers under irrevocable trusts, which are not regarded as “transfers”. Consequently, such transactions do not trigger a taxable event under the Income Tax Act, providing a means for investors to manage their portfolios without incurring additional tax liabilities. 

Under Section 112A, long-term capital gains from listed equity shares and equity mutual funds are tax-free up to Rs 1 lakh per annum, provided the Securities Transaction Tax is paid. Gains above this limit are taxed at 10% without indexation. This exemption allows investors to realise a substantial amount of tax-free income annually from their equity investments, provided they adhere to the stipulated conditions. For example, if an investor’s long-term capital gains amount to Rs 99,000, no tax is payable for that financial year. 

Reinvestment of long-term capital gains into residential property under Section 54F offers another avenue for tax exemption. Investors can claim exemption by reinvesting the net sale consideration, given they do not own more than one residential house at the time of investment. The reinvestment must occur within a specified timeline—either one year prior to or two years after the sale, or within three years if the property is under construction. Partial exemption is available if only part of the proceeds are reinvested. This strategy allows investors to leverage their gains into housing, potentially enhancing their financial position while avoiding capital gains tax.