As the financial year nears its end, investors start reviewing portfolios — not just to check returns but also to optimize taxes.
If you’ve invested in mutual funds, your capital gains (profits made from selling or redeeming units) can significantly impact your tax outgo before March 31.
But with timely planning, you can legally reduce your tax liability and make your portfolio more efficient.
Here’s a smart, step-by-step guide on how to plan taxes on mutual fund capital gains before the year ends.
1️⃣ Understand Capital Gains: Short-Term vs Long-Term
Before you plan taxes, know how your gains are classified:
| Mutual Fund Type | Holding Period | Short-Term Tax Rate | Long-Term Tax Rate |
|---|---|---|---|
| Equity Funds | < 12 months | 15% | 10% (on gains > ₹1 lakh/year) |
| Debt Funds | < 36 months | As per income tax slab | 20% with indexation |
| Hybrid Funds | Depends on equity allocation | Based on category | Based on category |
✅ Action: Identify which of your investments qualify as short-term (less than 1 year for equity or 3 years for debt) and which are long-term.
💡 Tip: Avoid redeeming short-term units just to book profit — you’ll pay higher tax and lose compounding benefits.
2️⃣ Book Long-Term Gains Strategically (Tax Harvesting)
If your long-term equity gains exceed ₹1 lakh in a financial year, the amount beyond ₹1 lakh is taxed at 10%.
✅ Action Plan:
Redeem enough equity units before March to book up to ₹1 lakh gains tax-free.
Immediately reinvest the same amount (if you want to stay invested) — this resets your cost of acquisition.
💡 Example: If you made ₹1.5 lakh in long-term gains this year, redeem and reinvest ₹1 lakh worth of units to save ₹10,000 in tax.
This strategy, called tax harvesting, works best for equity and ELSS funds.
3️⃣ Offset Losses to Reduce Gains
If you’ve booked profits in some mutual funds, look for others showing losses — these can offset your taxable gains.
✅ Action Plan:
Set off short-term losses against both short- and long-term gains.
Long-term losses can only be set off against long-term gains.
Carry forward unadjusted losses for up to 8 years to offset future gains.
💡 Pro Tip: Use this before March 31 to balance your portfolio and minimize tax outflow.
4️⃣ Switch, Don’t Redeem — When Rebalancing
If you plan to rebalance your portfolio (say, moving from equity to hybrid), use the switch option in your mutual fund account rather than a redemption.
Switching between schemes within the same AMC still counts as a sale for tax purposes, but timing the switch smartly — such as after a 12-month period for equity funds — can convert short-term to long-term gains, reducing taxes.
💡 Tip: Do this in December–January, so you still have time to fine-tune your year-end tax position.
5️⃣ Use Tax-Saving Mutual Funds (ELSS) For Deductions
To reduce your overall taxable income, invest in Equity-Linked Savings Schemes (ELSS) before March 31.
Under Section 80C, you can claim up to ₹1.5 lakh deduction in a financial year.
ELSS funds have a 3-year lock-in and offer equity-linked growth plus tax benefits — ideal for salaried professionals looking to save tax efficiently.
💡 Tip: Instead of lump-sum in March, start SIPs from December — it balances risk and ensures tax benefits across the year.
6️⃣ Review Dividend Options
If you hold dividend-paying mutual funds, remember that dividends are taxable in your hands as per your income slab.
✅ Action Plan:
Switch to growth options if you’re in a higher tax bracket.
Use dividend reinvestment plans only if they suit your cash flow and tax profile.
7️⃣ Don’t Forget Indexation Benefits (Debt Funds)
For debt mutual funds held more than 3 years, indexation adjusts your purchase cost for inflation, lowering your taxable gains.
✅ Action Plan:
Hold existing debt funds till they qualify for long-term taxation.
Use indexation benefit while filing returns for older investments.
💡 Example: If you invested ₹5 lakh in 2021 and sold in 2025 for ₹6 lakh, inflation indexing can reduce your taxable gain to about ₹60,000 instead of ₹1 lakh — saving ~₹8,000 in tax.
Frequently Asked Questions (FAQ)
Q1: When should I plan my mutual fund taxes?
Start reviewing by December, so you can book losses, harvest gains, or invest in ELSS before March 31.
Q2: Is SIP redemption taxable?
Yes. Each SIP installment is treated as a separate investment with its own holding period.
Q3: Can I avoid tax by reinvesting gains?
No — reinvestment doesn’t exempt tax. But tax harvesting helps minimize taxable gains.
Q4: Can I offset stock losses against mutual fund gains?
Yes, provided they fall under the same capital gains head.
Q5: What is the tax on debt mutual funds after 2023 changes?
Post-April 2023, new investments in debt funds (with <35% equity exposure) are taxed as per your slab, without indexation benefit.
Published on : 10th November
Published by : SMITA
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Source credit : Written by Personal Finance Desk — NDTV Profit / Investment Insights Division