Budget 2024: Tax Changes of Mutual Funds

Budget 2024, This is New Government Modi 3.0’s first budget, many expectations have been and have not been met in this budget.

There are a few changes in the Taxation of Mutual Funds that have been announced in this budget which I feel are very important for you to know and understand because as a Mutual Fund Investor, these changes will also impact you.

So, we will understand what taxation was earlier on different types of Mutual Funds and what taxation is after this budget as this will give you a fair idea of what exact tax changes of mutual funds had been done by the GOI.

Tax Changes of Mutual Funds

Before, understanding Tax Changes of Mutual Funds, let me reiterate the Finance Minister’s Speech on Capital Gain Taxes,

Simplification and Rationalisation of Capital Gains 

• Capital gains taxation is also proposed to be hugely simplified. 
• Short term gains on certain financial assets shall henceforth attract a tax rate of 20 per cent, while that on all other financial assets and all
  non-financial assets shall continue to attract the applicable tax rate.
• Long term gains on all financial and non-financial assets, on the other hand, will attract a tax rate of 12.5 per cent. For the benefit of the lower and middle-income classes, I propose to increase the limit of exemption of capital gains on certain financial assets to ₹ 1.25 lakh per year.
• Listed financial assets held for more than a year will be classified as long term, while unlisted financial assets and all non-financial assets will have to be held for at least two years to be classified as long-term. 
• Unlisted bonds and debentures, debt mutual funds and market linked debentures, irrespective of holding period, however, will attract tax on capital gains at applicable rates.
  

Source: indiabudget.gov.in

Now, let’s understand what these changes mean for you as a Mutual Fund Investor.

Three Types of Mutual Funds

There are mainly three types of Mutual Funds in which we as an investor invest our money, all three have different tax treatments which we will understand below, but let’s know types of mutual funds first.

1. Equity Mutual Funds
2. Debt Mutual Funds
3. Other Mutual Funds (like Gold, FOFs, International, etc.)

Tax Changes on Equity Mutual Funds

For taxation purposes, any fund that has 65% or more in Equity or Equity related investments will be categorized as Equity Mutual Funds.

Earlier before 23 Jul 2024
Capital Gain Taxes on Equity Mutual Funds were as Short Term (if redeemed before 1 year) and Long Term (if redeemed after 1 year).

Short Term Capital Gain Tax: 15%
Long Term Capital Gain Tax: 10% on Gains above Rs.1 Lakh in a Financial Year.

Now after 23 Jul 2024
Capital Gain Taxes on Equity Mutual Funds were as Short Term (if redeemed before 1 year) and Long Term (if redeemed after 1 year). – This Remains Same.

Short Term Capital Gain Tax: 20% (increased 5%)
Long Term Capital Gain Tax: 12.5% (increased 2.5%) on Gains above Rs.1.25 Lakhs (increased by 25,000) in a Financial Year.

Tax Changes on Debt Mutual Funds

For taxation purposes, any fund that has 65% or more in Debt or Bonds investments will be categorized as a Debt Mutual Fund.

Earlier before 23 Jul 2024
No Concept of Long Term Short Term in Debt Mutual Funds.

Capital Gain Tax: Taxed at Marginal Tax Rate (as per Income Tax Slab).

Now after 23 Jul 2024
No Concept of Long Term Short Term in Debt Mutual Funds.

Capital Gain Tax: Taxed at Marginal Tax Rate (as per Income Tax Slab) – Remains Same.

Tax Changes on Other Mutual Funds

For taxation purposes, these are those funds that don’t fit in any category of Equity or Debt Fund where they don’t have a minimum of 65% in Equity or Debt. These Funds are like Gold Funds, FOFs, International Funds, Multi Asset Funds, etc.

Earlier before 23 Jul 2024
Capital Gain Taxes on Other Mutual Funds were as Short Term (if redeemed before 3 years) and Long Term (if redeemed after 3 years).

Short Term Capital Gain Tax: Taxed at Marginal Tax Rate (as per Income Tax Slab)
Long Term Capital Gain Tax: 20% after adjusting for indexation or Marginal Tax Rates for some assets.

Now after 23 Jul 2024
Capital Gain Taxes on Other Mutual Funds were as Short Term (if redeemed before 2 years) and Long Term (if redeemed after 2 years). – Reduced to 2 Years

Short Term Capital Gain Tax: Taxed at Marginal Tax Rate (as per Income Tax Slab) – Remains Same
Long Term Capital Gain Tax: 12.5% without Indexation. – Indexation Benefit Not Applicable and Tax Reduced.

Overall, for Long Term Investors in International Funds & FOF have little benefit instead of the Marginal Tax Rate they have to now pay 12.5% for long-term gains.

I hope this helps you understand the Tax Changes of Mutual Funds after Budget 2024. Do let me know if you have any queries you can email me at contact [at] gurpreetsaluja.com

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