Changes in taxation for mutual funds

Mutual funds are becoming the popular route for retail investors to participate in the capital markets with assets under management of the industry crossing ₹60 lakh crore. The Union Budget 2024-25 has changed capital gains taxes on financial assets.


WHAT IS THE TAX REGIME FOR EQUITY-ORIENTED MF SCHEMES?

As per income tax laws, any gain from the sale of units in an equity-oriented mutual fund scheme that invests at least 65% of its corpus in domestic equity will be taxed as short-term capital gain (STCG) if sold before a year of purchase and as long-term capital gains (LTCG) if sold beyond a year of purchase.


WHAT ARE THE CHANGES IN THE BUDGET?

As per the new proposals, equity investors shall enjoy an additional ₹25,000 as tax-free income in a financial year as LTCG up to ₹1.25 lakh will be exempt, up from the earlier limit of ₹1 lakh. For gains above ₹1.25 lakh in a financial year from equity-oriented MFs, investors will have to pay LTCG tax at 12.5% from 10% earlier. For sales before a year of purchase, they have to pay STCG tax at 20% compared to 15% earlier.

WHAT FUNDS ARE COVERED UNDER EQUITY TAXATION?

Funds where the equity holding is more than 65% of the total portfolio are classified as equity funds for taxation. All equity schemes, arbitrage funds, balanced funds (which typically have 65-75% equity and 25-35% debt) and equity savings funds (equity, debt and arbitrage) are classified as equity-oriented funds from a taxation perspective.

WHAT ARE THE CHANGES FOR DEBT MFS?

There is no change proposed in the budget for debt-oriented schemes. Investors will have to pay capital gains tax on these schemes in line with their income slabs irrespective of the holding period.

IS THE INDEXATION FACILITY AVAILABLE FOR ANY MF SCHEME NOW?

According to the budget proposals, no indexation facility will be available for any mutual fund scheme. Earlier, some schemes that held 35-65% in equity, in categories like multi-asset and equity hybrid could get indexation benefits. Now such investors who hold these schemes for 24 months and above, will have to pay LTCG tax at 12.5%, while if they sell before 24 months they will pay STCG tax in line with their slab rate.

HOW ABOUT GOLD/ SILVER FUNDS, FOFS AND INTERNATIONAL EQUITY SCHEMES?

Fund of Funds (mutual funds which invest in other funds), international funds (funds that have more than 35% exposure to international equities) and gold/ silver funds were earlier treated as debt instruments and taxed at slab rates. The budget has removed this anomaly. Now, any investments made in these schemes after July 23 and held for 24 months and above will be charged LTCG tax of 12.5%, while a holding period of less than 24 months will attract STCG tax in line with the slab rate.