Tax Basics — Small Cap as Equity Fund
For tax purposes, small cap mutual funds are treated as equity-oriented mutual funds — meaning the same tax rules that apply to investing in shares directly also apply to small cap funds.
LTCG — Long Term Capital Gains Tax
Long term capital gains apply when you hold your small cap mutual fund units for more than 1 year before redeeming.
| Holding Period | Tax Rate | Exemption | Effective Tax |
|---|---|---|---|
| More than 1 year (LTCG) | 12.5% | ₹1.25 lakh per year | 12.5% on gains above ₹1.25L |
| Less than 1 year (STCG) | 20% | None | 20% on entire gain |
STCG — Short Term Capital Gains Tax
If you redeem your small cap fund units within 1 year of purchase, 20% STCG tax applies on the entire gain — with no exemption limit.
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Budget 2024 Changes — What Changed
Budget 2024 made significant changes to capital gains taxation. Here is a clear summary of what changed for equity mutual fund investors.
| Parameter | Before Budget 2024 | After Budget 2024 |
|---|---|---|
| LTCG Tax Rate | 10% | 12.5% (increased) |
| LTCG Exemption Limit | ₹1 lakh per year | ₹1.25 lakh per year (increased) |
| STCG Tax Rate | 15% | 20% (increased) |
| Holding Period for LTCG | More than 1 year | More than 1 year (unchanged) |
| Indexation benefit | Not available for equity | Not available for equity (unchanged) |
The ₹1.25 Lakh Exemption — How to Use It Smartly
Every year you can redeem up to ₹1.25 lakh of long-term capital gains completely tax-free. Over a lifetime of investing, using this exemption intelligently every year can save you lakhs in taxes.
💡 Smart Strategy
Every March — review your small cap portfolio. If you have unrealised long-term gains, redeem units worth up to ₹1.25 lakh of gains and immediately reinvest the same amount. You reset your cost basis at a higher level, reducing future tax liability — all without losing your investment position. This is called Tax Harvesting.Tax Harvesting Strategy — Step by Step
- 1Check your gains in February–March — Log into your platform (Kuvera, Zerodha) and check the long-term capital gains on each fund.
- 2Redeem units with gains up to ₹1.25 lakh — Only redeem units held for more than 1 year. This triggers LTCG but within the exempt limit — so zero tax.
- 3Reinvest immediately — Same day or next day, reinvest the same amount in the same fund. Your new units now have a higher cost basis.
- 4Repeat every year — This annual ritual can save you significant taxes over a 15–20 year investment journey.
Tax on SIP Investments — FIFO Rule
For SIP investments, each monthly instalment is treated as a separate purchase for tax purposes. When you redeem, the First In First Out (FIFO) rule applies — the units purchased earliest are considered sold first.
Tax Saving Tips — Smart Investor Checklist
- ✓Never redeem within 1 year — The jump from 12.5% to 20% tax rate is significant. Hold for at least 366 days always.
- ✓Do annual tax harvesting — Use the ₹1.25 lakh LTCG exemption every year without fail.
- ✓Choose Direct Plan — Lower expense ratio means higher NAV growth, which means more compounding on a larger base.
- ✓Keep records of all transactions — For accurate tax filing, maintain your purchase dates and NAVs. All good platforms provide downloadable statements.
- ✓File ITR correctly — Capital gains from mutual funds must be reported in ITR-2. Use your platform's capital gains statement for accurate figures.