LTCG Mutual Funds: How Long-Term Gains Work in India and How to Save Tax

When you sell LTCG mutual funds, long-term capital gains from equity mutual funds held for more than one year in India. Also known as equity mutual fund gains, they’re taxed at 10% above ₹1 lakh in profits. This rule changed in 2018, and since then, millions of investors have had to rethink how they hold and sell their funds. Unlike before, there’s no more free ride—gains over ₹1 lakh in a year are taxable, even if you didn’t withdraw any cash.

What makes LTCG different from short-term gains? Equity mutual funds, funds that invest at least 65% of assets in Indian stocks are the main players here. If you hold them for over 12 months, you fall under LTCG rules. But if you sell within a year, it’s STCG—taxed at 15%. The big question isn’t just when to sell, but how to plan your exits so you don’t accidentally trigger tax on gains you didn’t expect. Many people think holding longer automatically means lower tax, but that’s not true. The ₹1 lakh exemption is annual, not per fund. So if you have three equity funds and each makes ₹50,000 in gains this year, you’re still under the limit. But if one fund hits ₹1.2 lakh, you pay tax on ₹20,000.

It’s not just about timing—it’s about the fund type. ELSS funds, tax-saving mutual funds under Section 80C with a three-year lock-in, are also subject to LTCG rules after the lock-in ends. So even if you bought an ELSS for tax savings, you still pay 10% on gains over ₹1 lakh when you sell after three years. And don’t assume debt funds are safe—those follow different rules entirely. LTCG only applies to equity and hybrid equity-oriented funds. Debt funds use indexation, which can reduce your tax burden significantly.

Here’s what most people miss: the ₹1 lakh exemption resets every financial year. That means you can harvest gains up to ₹1 lakh each April 1 without paying tax. It’s not a one-time benefit. If you’ve held funds for years and have big unrealized gains, you can spread them out over multiple years to stay under the limit. This is called tax-loss harvesting—but you need to sell at a loss to offset gains. And yes, you can do both in the same year. If one fund lost money and another gained, you can use the loss to cancel out the gain and reduce your tax bill.

What about dividends? They don’t count as capital gains. Dividends from mutual funds are tax-free in your hand, but the fund house pays a dividend distribution tax. That’s already factored into the NAV. So when you see a drop in NAV after a dividend, that’s normal. It’s not a loss—it’s just money moving from your investment into your pocket.

The posts below cover everything you need to know to manage your mutual fund portfolio under these rules. You’ll find guides on how to switch between funds without triggering tax, how expense ratios eat into your returns over time, how to calculate real returns after tax, and how to use SWPs to generate income without selling large chunks. You’ll also see how ELSS funds fit into your tax plan, what happens when you hold funds for 10 years, and how to avoid common mistakes that cost people thousands in unnecessary tax.