Your fund house cut more tax than you owe on a redemption, and how to get it back

The fund house has to deduct at the point of redemption, before it knows your full tax picture, so it applies the flat statutory rate to the gross gain. It does not apply your ₹1.25 lakh annual long-term exemption under Section 112A, because that is a relief you claim in your return, not something the AMC can give. It often does not split the gain precisely by how long each set of units was held, and it applies the rate to the whole gain rather than to the smaller taxable figure that remains after your exemption.

The rates themselves are correct as far as they go: long-term equity gains at 12.5% above the exemption, short-term equity gains at 20% under Section 111A after 23 July 2024. The over-deduction comes from applying them to the gross gain without your reliefs, and, most of all, from surcharge.

This is the part that most often produces a large over-deduction on a bigger redemption. The higher surcharge slabs of 25% and 37% that apply to very high incomes do not apply to capital gains at all. Surcharge on capital gains under Sections 111A, 112 and 112A is capped at 15%, no matter how large the gain.

A fund house that runs an automated deduction and applies surcharge at a higher slab, or applies surcharge where little or none was due, over-withholds, sometimes by a substantial margin. Because the cap is a return-level correction, the AMC's system frequently does not reflect it at source. So when you rebuild the tax properly in your return with surcharge capped at 15%, the figure is often well below what was deducted, and the difference is yours to reclaim.

The recovery happens through your Indian return. A practising CA computes the gain correctly across all your folios, applies the ₹1.25 lakh exemption and the right holding-period split, uses the correct rate and the 15% surcharge cap, and sets the TDS the AMC deducted against the real liability. Where the TDS exceeds the actual tax, which is common once the exemption and the cap are applied, the excess is refunded.

The refund carries interest under Section 244A at 0.5% a month from the start of the assessment year until it is paid. The lever is entirely in getting the computation right and reconciling the TDS shown against your PAN, which is exactly the kind of reconciliation an NRI cannot easily do from abroad but a CA closes quickly from the Indian side.