Tax treatment under LTCG/LTCL for Debt and Equity MFs on selling and set off conditions

I wish to know how to set off LTCG against LTCL for Debt and Equity Mutual Fund Units.

All the units both debt and Equity category were bought more than 3 years ago. (But No grandfathering) So 20% tax after indexation is still applicable for the debt funds, as bought before 1/04/2023 and sold now.

1) If I sell Debt MF after 3 years' holding and incur LTCL after indexation. (bought 4 years back)

2) Also, if I sell my Equity Mutual Fund units after 1 year holding and incur LTCG. Can I set off LTCL from debt fund mentioned in item 1, against the LTCG from the sell of Equity fund? If the LTCL is more than the LTCG, then can I carry forward the LTCL for next 8 years? If the LTCG happens to be more than the LTCL, then the net remaining LTCG is taxable (amount greater than Rs 1lahk), at the rate of 10%, am I right? Next case,

3) I incur LTCG from the sell of Debt Mutual Fund units after indexation after three years.

4) I incur LTCL from the sell of my Equity Mutual Fund units after one year. Can I set off LTCL from Equity fund mentioned in item 3, against the LTCG from the sell of Debt fund? If the net result is LTCG from the Debt Fund, will it be taxed at the rate of 20%? Please let me know.

My point is, even though the tax treatment of LTCG/LTCL from the sell of Debt and Equity Funds are different, they still can be set off against each other? The net LTCG after set off, is from Debt fund, can it still get Rs. 1 lakh exemption from tax?

Sunil Joshi

suniljoshi2005 @ gmail.com

Hi Sunil! Your questions are about the tax treatment and set-off rules for LTCG (Long-Term Capital Gains) and LTCL (Long-Term Capital Loss) arising from Debt and Equity Mutual Funds. Let's break it down carefully:

1. LTCG & LTCL Tax Treatment for Debt and Equity Mutual Funds

Debt Mutual Funds:
- Holding period > 3 years → LTCG taxed at 20% with indexation.
- LTCL on debt funds (after indexation) can be set off only against LTCG on debt funds.
Equity Mutual Funds:
- Holding period > 1 year → LTCG taxed at 10% without indexation for gains above ₹1 lakh.
- LTCL on equity funds can be set off only against LTCG on equity funds.

2. Set-off Rules Between Debt and Equity Funds

Capital gains tax provisions distinctly classify equity and debt funds. The set-off rules also follow this separation:

Set-off of LTCG and LTCL across debt and equity funds is NOT allowed.
In other words:
- LTCL from debt funds can only be set off against LTCG from debt funds.
- LTCL from equity funds can only be set off against LTCG from equity funds.

3. Specific scenarios you asked:

Scenario 1 & 2:

You incur LTCL on Debt MF (after indexation).
You have LTCG on Equity MF (after 1 year holding).

Can you set off LTCL from Debt MF against LTCG from Equity MF?

No, you cannot. Because debt and equity capital gains/losses are treated separately under the Income Tax Act.

If LTCL from debt is more than LTCG from equity, you cannot carry forward the debt LTCL to set off equity LTCG in the future.
Debt LTCL can only be carried forward to set off debt LTCG in future 8 assessment years.
Equity LTCG above ₹1 lakh is taxed at 10%, as you said.

Scenario 3 & 4:

LTCG from Debt MF after 3 years (20% tax with indexation).
LTCL from Equity MF after 1 year.

Can you set off LTCL from Equity against LTCG from Debt?

No. Same reason as above — no cross-set off between equity and debt gains/losses.

4. Rs 1 lakh exemption applicability

The ₹1 lakh exemption on LTCG applies only to equity shares and equity-oriented mutual funds.
It does NOT apply to debt mutual funds.

So, even after any set-off (which is possible only within equity funds), the exemption applies only to equity LTCG.

Summary Table:

Fund Type	LTCG Tax Rate	LTCL Set-off Allowed Against	Carry Forward Allowed?	Rs 1 Lakh Exemption?
Debt Mutual Fund	20% with indexation	Only LTCG from Debt Funds	Yes, 8 years	No
Equity Mutual Fund	10% without indexation (>1L)	Only LTCG from Equity Funds	Yes, 8 years	Yes

Bottom Line:

Debt and Equity MF LTCG/LTCL are treated separately for tax and set-off purposes.
You cannot set off losses/gains between debt and equity funds.
Carry forward is allowed only within the same category.
Rs 1 lakh exemption is only for equity LTCG.