Tax treatment under LTCG/LTCL for Debt and Equity MFs on selling (bought 3 years back)

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. (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! Let me clarify your doubts about set-off and tax treatment of LTCG and LTCL on Debt and Equity Mutual Funds (MFs) held for more than 3 years, step-by-step:

Key facts:

Debt MFs held > 3 years: LTCG taxed at 20% with indexation. Losses are LTCL (Long Term Capital Loss).
Equity MFs held > 1 year: LTCG taxed at 10% without indexation for gains exceeding ₹1 lakh. Losses are LTCL.
No grandfathering for your case (units bought before 01-Apr-2023).

Your Questions & Answers:

1) Can LTCL from Debt MF (item 1) be set off against LTCG from Equity MF (item 2)?

No.
The Income Tax Act treats equity and debt capital gains/losses separately.
You cannot set off LTCL from debt funds against LTCG from equity funds.
Losses and gains must be adjusted within the same asset class.

2) If LTCL (Debt) > LTCG (Equity), can the LTCL be carried forward for 8 years?

You cannot set off across asset classes, so LTCL from Debt MF remains separate.
Yes, LTCL on debt funds can be carried forward for up to 8 assessment years.
Similarly, LTCL on equity funds can be carried forward separately.

3) If LTCG (Equity) > LTCL (Debt), is the remaining LTCG taxable at 10% (over ₹1 lakh)?

Since you cannot set off across asset classes, LTCG from equity MFs will be taxed at 10% without indexation, if exceeding ₹1 lakh.
The loss from debt funds won't reduce this tax liability.

4) Can LTCL from Equity MF (item 4) be set off against LTCG from Debt MF (item 3)?

No, same reason — no cross category set-off.
Losses from equity funds cannot be set off against gains from debt funds.

5) If net LTCG is from Debt MF after set off (hypothetically), will it be taxed at 20%?

Set off between categories is not allowed.
LTCG on debt MF is taxed at 20% with indexation.
LTCG on equity MF is taxed at 10% without indexation (above ₹1 lakh exemption).

6) Does the ₹1 lakh LTCG exemption apply to Debt MF LTCG?

No.
The ₹1 lakh exemption on LTCG is only for equity-oriented mutual funds and equity shares.
No such exemption exists for LTCG on debt mutual funds.

Summary Table

Asset Class	Can Set Off Losses Against	LTCG Tax Rate	Carry Forward of Losses	₹1 Lakh LTCG Exemption
Debt Mutual Funds	Only Debt MF LTCG	20% with indexation	Yes, 8 years	No
Equity Mutual Funds	Only Equity MF LTCG	10% without indexation (>₹1L)	Yes, 8 years	Yes

Conclusion

Losses and gains from Debt and Equity MFs cannot be cross set off.
You must compute and pay tax separately for each category.
Carry forward losses separately under each category.
LTCG on equity MFs enjoys ₹1 lakh exemption, but LTCG on debt MFs does not.

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Sunil Joshi

Asha Kanta Sharma