Suppose you invested Rs 5,00,000 in an equity mutual fund and it is now worth Rs 9,00,000 after a 5-year holding period. The absolute gain is Rs 4,00,000. Because the holding is over 12 months, this is a long-term capital gain on equity, taxed under Section 112A at 12.5 percent on the amount above the Rs 1,25,000 annual exemption. The taxable gain is Rs 4,00,000 minus Rs 1,25,000, which is Rs 2,75,000, and the tax is 12.5 percent of that, or about Rs 34,375. The after-tax value is therefore about Rs 8,65,625. The annualised return, or CAGR, is the fifth root of 9,00,000 divided by 5,00,000, minus one, which works out to about 12.47 percent a year. That single CAGR figure is more useful than the absolute gain when comparing funds held for different periods.
How it is calculated
The tool computes the absolute gain as current value minus amount invested, then annualises it as a compound annual growth rate, taking the ratio of current to invested value to the power of one divided by the years, minus one. For tax, it checks the holding period. Equity held over 12 months is long-term, taxed at 12.5 percent on the gain above the Rs 1.25 lakh annual exemption under Section 112A, with no indexation allowed. Equity held 12 months or less is short-term, taxed at 20 percent on the whole gain. Debt funds bought after April 2023 are taxed at slab rate regardless of holding, so this equity logic does not apply to them. The after-tax value subtracts the computed tax from the current value, giving a realistic picture of what you would keep if you redeemed today.
Frequently asked questions
Tax on equity MF?
Held >12 months: LTCG 12.5% on gains above ₹1.25L/year. Held ≤12 months: STCG 20%. Debt funds (post-April 2023): taxed at slab rate regardless of holding.
What is the Rs 1.25 lakh LTCG exemption?
Under Section 112A of the Income Tax Act, equity mutual fund investors get an annual exemption of Rs 1,25,000 on long-term capital gains. Only the gain above this threshold is taxed at 12.5 percent. The exemption resets every financial year and cannot be carried forward.
Does indexation apply to equity mutual funds?
No. Section 112A explicitly disallows cost indexation for listed equity shares and equity-oriented mutual funds. The tax is always 12.5 percent on the flat gain above the exemption, with no inflation adjustment to the purchase price.
How is CAGR different from absolute return?
Absolute return is simply (current value minus invested amount) divided by the invested amount, expressed as a percentage. CAGR, or compound annual growth rate, annualises that return over the holding period so you can compare funds held for different durations. A 80 percent absolute return over 10 years is far less impressive than the same return over 2 years, and CAGR makes that difference visible.