Question

What tax implication must an investor consider when rebalancing a portfolio by selling equity mutual fund units?

Accepted Answer

Redemption of equity fund units triggers capital gains tax — LTCG at 12.5% (above ₹1.25 lakh exemption) or STCG at 20% depending on the holding period — Selling mutual fund units for rebalancing is a taxable redemption. Equity units held over 12 months attract LTCG at 12.5% on gains above the ₹1.25 lakh annual exemption. Units held under 12 months attract STCG at 20%. This tax cost must factor into the rebalancing decision — alternatives like redirecting new SIPs to underweight assets can reduce taxable events.