The Union Budget 2024 announced changes in the tax structure of financial investments. The short-term and long-term capital gains taxes levied on investments in financial instruments have been increased and restructured as per the budget announcements. This is relevant to mutual fund investors as capital gains taxes are levied on mutual fund scheme investments.

Changes in tax structure can impact the Return on Investment (ROI) of your mutual fund investments, so let’s review the taxation changes announced in the budget and their impact on your mutual fund investments. But first, let’s understand the pre-budget tax structuring of mutual funds to understand the proposed changes better.

Pre-Budget Tax Structure

The pre-budget tax structure is crucial for you to know and understand because specific holding period considerations, tax rates, and benefits have since been changed. The aim of the government was to simplify taxation on investments and bring uniformity to financial investment taxation. Here is a detailed look into how mutual fund schemes were taxed before the union budget.

1. Equity-Oriented Mutual Funds: Equity-oriented mutual fund schemes were taxed at 15% STCG for any holding period less than 12 months and 10% LTCG for any holding period over 12 months.

2. Debt-Oriented Mutual Funds: Debt-oriented mutual fund schemes were taxed as per the investor’s income tax slab. The STCG and LTCG calculation was made based on a holding period of less than 36 months for STCG and more than 36 months for LTCG.

3. Hybrid Mutual Funds: Hybrid mutual fund schemes were taxed based on their orientation. If the fund portfolio consisted of 65% or more investment in equity, it was taxed as per the rules of equity-oriented mutual fund schemes. For hybrid funds that had a 65% or higher portfolio investment in debt, the taxation was done as per the rules of debt-oriented mutual fund schemes.

4. Gold Mutual Funds: Gold mutual fund schemes were taxed as per the investor’s income tax slab for both LTCG and STCG. A holding period of less than or more than 36 months was used to determine long-term or short-term capital gains.

5. Overseas Mutual Funds: Lastly, overseas mutual fund schemes were taxed based on the holding period. LTCG tax was levied if the holding period was more than 36 months at 20% with indexation benefits. The STCG was levied as per the investor’s income tax slab for holding periods of less than 36 months.

Highlights of the Changes To Mutual Fund Taxation Announced in The Budget

The main change that caught the attention of investors countrywide was the increase in both STCG and LTCG tax rates. After the 2024 budget, the LTCG tax rate currently stands at 12.5% and STCG at 20%. Changes were also announced for the holding period of mutual fund investments and the exemption limit of LTCG. Here’s a detailed look at the various changes announced in the budget.

1.LTCG tax rate has been increased from 10% to 12.5%.

2. LTCG tax has been fixed at 12.5% for investments in all financial and non-financial assets.

3. STCG tax rate has been increased from 15% to 20% for units of equity-oriented mutual fund schemes.

4. The exemption limit for LTCG tax has been increased from ?1 lakh to ?1.25 lakh per year.

5. The holding period of all listed securities has been fixed at 12 months for short and long term capital gains/loss determination. Any holding period beyond 12 months is eligible to attract LTCG taxes.

6. The 36-month holding period has been removed from consideration. The holding period for LTCG calculation of all other assets has been fixed at 24 months.

With these highlights out of the way, let’s review what impact these changes will have on different types of mutual fund investments.

Impact of New Budget Announcement on Different Types of Mutual Fund Schemes

Let’s take a quick look at what impact will the budget announcement have on various types of mutual fund schemes: 

Equity-Oriented Mutual Fund Schemes

The tax rate of equity-oriented mutual fund schemes have changed after the budget announcements. The STCG tax has increased from 15% to 20% and the LTCG tax has increased from 10% to 12.5%. The holding period of equity-oriented mutual fund schemes for LTCG and STCG tax determination has not been changed, it remains at over or under 12 months accordingly.

Debt-Oriented Mutual Fund Schemes

The tax rate for debt-oriented mutual fund schemes remains fixed to be calculated as per the investor’s income tax slab, post-budget. However, the holding period consideration for LTCG and STCG consideration has been changed from 36 months to 24 months.

Hybrid Mutual Fund Schemes

Both the tax rate and holding period consideration for hybrid mutual fund schemes have changed after the union budget 2024. Pre-budget, if the holding period was more than 36 months, these schemes were taxed as per the investor’s tax slab (LTCG and STCG). The holding period for specified mutual funds, which are debt-oriented (more than 65% invested in debt instruments), has changed to more than 24 months for LTCG and STCG tax calculations. The tax rate will continue to be levied as per the investor’s income tax slab.

Overseas Mutual Fund Schemes

Overseas mutual fund schemes now have new tax rates and holding period considerations for LTCG and STCG calculations. The LTCG has now been capped at 12.5% for overseas funds from the investor’s income tax slab. The holding period for the consideration of LTCG has been reduced from 36 months to 24 months. The STCG tax rate remains to be calculated as per the investor’s income tax slab.

Gold Mutual Fund Schemes

Gold mutual fund schemes have also been affected by the Union Budget announcements. The holding period consideration for LTCG has been reduced from 36 months to 24 months and the LTCG tax rate has been fixed at 12.5%. The STCG tax calculation is to be done as per the investor’s income tax slab for any holding period less than 24 months.

Conclusion

With the changes announced in the Union Budget, there’s a lot to unpack for mutual fund investors. For the most part, the capping of the LTCG tax rate at 12.5% is expected to be a welcome bonus for mutual fund investors as previously, the LTCG tax rate could have gone up to 30% when calculated as per the income tax slab rates.

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