Know the tax rules before selling shares or mutual funds, or else your profits will be reduced..

Investor interest in equity mutual fund schemes is growing. These schemes invest in the shares of companies listed on stock exchanges. Many people avoid investing directly in stocks, preferring the relative safety of equity mutual fund schemes. Whether you invest in equity mutual funds or directly in stocks, it is essential to understand the tax rules before booking profits.

**Taxes Reduce Asset Returns**

Experts state that taxes reduce the real return on an asset. This applies to both mutual fund units and shares. Therefore, investors should clearly understand the tax regulations applicable to profits before selling mutual fund units or shares. Investors often sell shares and mutual funds without knowing the tax rules, which diminishes their actual returns.

**Tax Liability Depends on the Holding Period**

Selling shares of listed companies or equity mutual fund units attracts either Short-Term Capital Gains (STCG) tax or Long-Term Capital Gains (LTCG) tax on the profit amount. If an investor sells shares within 12 months of purchase, Short-Term Capital Gains tax applies to the profit. If sold after 12 months, Long-Term Capital Gains tax applies. This rule also applies to equity mutual fund schemes.

**20% Tax on Sales Before 12 Months**

The Short-Term Capital Gains tax rate is 20%. This can be easily understood with an example. Suppose you sell shares of a company before the 12-month mark, making a profit of ₹1,000. You would be required to pay Short-Term Capital Gains tax at a rate of 20% on this amount. Thus, you would pay ₹200 in tax on the ₹1,000 profit, reducing your actual profit to ₹800. 12.5% ​​tax on sale after 12 months

The Long-Term Capital Gains (LTCG) tax rate is 12.5%. Suppose you make a profit of ₹1,000 by selling shares of a company two years after purchasing them; you would be required to pay a 12.5% ​​tax on that ₹1,000 profit. This means you would pay ₹125 in tax, reducing your actual return to ₹875. The same rule applies to the sale of units in equity mutual fund schemes.

Long-term capital gains up to ₹1.25 lakh are tax-free

It is important to note that long-term capital gains of up to ₹1.25 lakh in a financial year are exempt from tax. This means that if you earn a profit of up to ₹1.25 lakh in a financial year from selling shares or units of equity mutual fund schemes, you will not have to pay any long-term capital gains tax.

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