New Delhi – The Union Budget 2024-25 has introduced significant changes to the capital gains tax on mutual funds, affecting both equity and non-equity investors. While the capital gains tax on equity shares and equity mutual funds has increased, investors can find relief in the reduced tax rates on fund of funds, gold ETFs, and international funds.
Increased Tax on Equity-Oriented Funds
Investors in equity-oriented funds face a double blow with the increased Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) taxes. The STCG tax on equity mutual funds has been hiked to 20 percent from the current 15 percent, and the LTCG tax has risen to 12.5 percent from the previous 10 percent. As a result, a Systematic Investment Plan (SIP) of Rs 50,000 for 60 months in equity funds would now incur a higher capital gains tax of Rs 94,095 compared to Rs 77,456 previously.
Relief in Exemption Limit
In a move to offer some relief, the government has increased the exemption limit for LTCG tax from Rs 1 lakh to Rs 1.25 lakh per financial year. This change will benefit small investors who have long-term investments in equity funds.
Taxation on Other Funds
The Union Budget has also lowered the capital gains tax rate on gold funds, gold exchange-traded funds (ETFs), overseas funds, and fund of funds (FoFs). However, debt mutual funds will continue to be taxed at the normal income tax rate. Mutual funds investing more than 65 percent of their total proceeds in debt and money market instruments will be covered under Section 50AA, excluding ETFs, Gold Mutual Funds, and Gold ETFs from being considered specified mutual funds.
Expert Opinions
Feroze Azeez, Deputy CEO of Anand Rathi Wealth, commented on the changes: “Although the tax rates are marginally increased, equity mutual funds remain an attractive investment opportunity compared to other asset classes. Therefore, we do not anticipate that the change in tax rates will significantly affect the flows towards equity mutual funds.”
Azeez further added, “The widening gap between STCG and LTCG rates is a clear incentive for longer-term holdings, which aligns with our view of creating sustainable wealth. This move is also a step towards standardizing taxation across various asset classes, potentially simplifying the investment decision-making process for many.”
Conclusion
The changes in the Union Budget 2024-25 reflect the government’s approach to incentivize long-term investments while maintaining a balanced tax structure across different types of mutual funds. Investors should carefully consider these changes and adjust their investment strategies accordingly.
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