Changes in Mutual fund taxation post Union Budget 2024

The Union Budget 2024 brought some changes to mutual fund taxation which will result in investors paying higher taxes. Finance Minister Nirmala Sitharaman announced a hike in capital gains tax which left some investors dismayed.

The new taxation policy has led to an increase in short-term capital gains (STCG) and long-term capital gains (LTCG). Capital gains tax is levied on the profit earned from the sale of any movable or immovable asset. The rate of capital gains varies from the asset class and the duration of holding.

Following the budget, equity-oriented mutual funds that have more than 65% exposure to equities will attract higher capital gains tax. If an investor holds these funds for less than a year, an STCG of 20% will be applicable which is higher than the previous rate of 15%. Meanwhile, if the holding period is longer than a year, it will attract a LTCG of 12.5% compared to the previous rate of 10%.

Debt-oriented mutual funds that comprise more than 65% of debt instruments will attract a slab rate irrespective of the holding period.

At the same time, other investments like gold funds, international funds, and some hybrid funds will attract the slab rate if the holding period is less than 24 months. Whereas, if the holding period is more than 24 months, an LTCG rate of 12.5% will be applicable compared to the slab rate that was applicable previously.

The Union Budget also announced the removal of indexation for all assets which allowed taxpayers to adjust the purchase price of the asset to account for inflation. Indexation was a helpful tool for taxpayers as the purchase price of assets would increase by taking inflation into consideration, consequently leading to lower capital gains.

However, the exemption on LTCG has been increased from ₹1 lakh to ₹1.25 lakh. This means if an investor’s long-term gain is less than ₹1.25 lakh, they would be exempt from paying any capital gains tax.