Finance Minister Nirmala Sitharaman presented the Union Budget for 2024-25 on July 23. While the Budget introduced many key changes, this blog primarily focuses on the impact on mutual fund investors after the changes in taxation.
Some Key Pointers for investors to keep in mind about taxation after yesterday’s budget:
- 1. The Long-Term Capital Gains tax rate for all financial and non-financial assets has increased from 10% to 12.5%.
- 2. The Short-Term Capital Gains tax on specified financial assets has been raised from 15% to 20%.
- 3. The indexation benefit, which allowed taxpayers to adjust an asset's purchase price for inflation, has been removed for all assets.
- 4. The exemption limit for long-term capital gains has been raised from ₹1 lakh to Rs 1.25 lakh per year.
Now, let's understand the Mutual Funds Taxation for different mutual fund categories.
Practical Implications for Investors
- 1. Investors in gold and silver ETFs, equity and hybrid FoFs, and international schemes will benefit from LTCG tax treatment.
- 2. Some newly launched hybrid funds may face higher taxes due to the removal of indexation benefits.
- 3. Equity fund investors will incur a higher LTCG tax.
- 4. Debt fund investors will experience no changes in their tax treatment.
Additionally, to streamline tax deducted at source or TDS rates, the Finance Minister has proposed eliminating the 20% TDS on repurchases of units by mutual funds or UTI.
Before October 1, 2024
Mutual fund redemptions over ₹1 lakh were subject to a 20% TDS.
Investors received a lower amount after the TDS deduction.
After October 1, 2024:
No TDS will be applied to mutual fund redemptions.
Investors will receive the full redemption amount.
Investors are still responsible for calculating and paying capital gains tax on their returns when filing their income tax return.
Let us understand how the new mutual funds taxation will affect different types of mutual fund investors using the following illustration:
Scenario 1 : the investor redeems all the mutual fund units before the completion of 12 months after the date of investment. Investor Invests in Equity Mutual Fund via Lump sum.
Investment Amount - ₹1,00,000
Redemption Amount - ₹ 1,35,000
In this scenario, the investor made a Short-term capital Gain of ₹35,000
STCG at Old Rate = ₹35,000 * 15% = ₹5,250
STGC at New Rate = ₹35,000 * 20% = ₹7,000
Scenario 2 : The investor redeems all the mutual fund units after the completion of 12 months after the date of investment. Investor Invests in Equity Mutual Fund via Lump sum.
Investment Amount - ₹1,00,000
Redemption Amount - ₹ 3,05,000
In this scenario, the investor made a Short-term capital Gain of ₹2,05,000
Note that each investor is allowed a standard deduction of ₹1,25,000 on LTCG which was earlier ₹1,25,000 each year. So, taking this deduction into consideration the LTCG tax for the investor would be calculated as follows:
LTCG at Old Rate = ₹ (2,05,000 – 1,00,000) * 10% = ₹10,500
LTGC at New Rate = ₹ (2,05,000 – 1,25,000) * 12.50% = ₹ 10,000
Under this scenario, the investor despite paying a higher rate on LTCGs is benefitted from the increased standard deduction applicable on the LTCGs.
Final Thoughts
The latest budget has streamlined the classification of assets across various mutual fund categories. It has also simplified the taxation rules for short-term capital gains (STCG) and long-term capital gains on both listed and unlisted assets. The increase in the STCG tax rate is seen as a precautionary measure by the government to protect investors from potential losses in the current euphoric markets. This move may also serve to discourage speculative trading, which can be more harmful than beneficial.
On the other hand, the hike in the LTCG tax rate has been criticized as it reduces the incentive for long-term investors in the market. Although the increase is minimal, it could potentially discourage investors from allocating their savings to productive asset classes like equity.
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