Union Budget 2024 Revamps Mutual Fund Taxation: What Investors Need To Know

Mutual Fund Taxation: Mutual funds with more than 65% allocation in debt instruments have also seen changes in their tax treatment

Investors will need to reassess their portfolios in light of the new tax implications, potentially shifting towards longer-term strategies to minimise tax liabilities.

Source : ABPLIVE AI

By Chakrivardhan Kuppala

The Union Budget 2024 introduced significant changes to the taxation framework for mutual funds, reflecting the government's intent to streamline and simplify tax structures. These changes are aimed at ensuring greater transparency and fairness in the financial market while encouraging long-term investments.

Product	Period of Holding	Before (Short Term)	Before (Long Term)	Period of Holding	After (Short Term)	After (Long Term)
Equity Oriented MF units	> 12 months	15.00%	10.00%	> 12 months	20.00%	12.50%
Specified Mutual Funds with more than 65% in debt	> 36 months	Slab rate	Slab rate	> 24 months	Slab rate	12.50%
Equity FoFs	> 36 months	Slab rate	Slab rate	> 24 months	Slab rate	12.50%
Overseas FoF	> 36 months	Slab rate	Slab rate	> 24 months	Slab rate	12.50%
Gold Mutual Funds	> 36 months	Slab rate	Slab rate	> 24 months	Slab rate	12.50%

Equity-Oriented Mutual Funds

For equity-oriented mutual funds, the long-term capital gains (LTCG) tax rate has been increased from 10% to 12.5%. This change applies to gains on investments held for more than 12 months. The short-term capital gains (STCG) tax rate for these funds has also been revised upward from 15% to 20% for investments held for less than 12 months. These adjustments are designed to align the tax rates with the overall capital gains structure, promoting long-term investments over speculative short-term trading.

Debt-Oriented and Specified Mutual Funds

Mutual funds with more than 65% allocation in debt instruments have also seen changes in their tax treatment. Previously, both STCG and LTCG were taxed at the slab rate applicable to the investor. However, under the new regime, while STCG continues to be taxed at the slab rate, LTCG on these funds will now attract a tax of 12.5% for holdings longer than 24 months. This is a significant shift aimed at providing clarity and consistency in the tax treatment of debt-oriented investments.

Fund of Funds (FoFs) and Overseas Investments

The tax regime for Fund of Funds (FoFs), including those investing overseas, has also been overhauled. Previously, gains from these investments were taxed at slab rates. Now, LTCG for these funds is taxed at a flat rate of 12.5%, provided the holding period exceeds 24 months. This change simplifies the tax process for investors and aligns it with the broader policy objectives of encouraging long-term investment.

Gold Mutual Funds

Investments in gold mutual funds have similarly been affected. The new budget stipulates that gains from these investments will be taxed at 12.5% for long-term holdings (over 24 months), a departure from the previous slab rate-based taxation. This move is likely intended to streamline the tax structure across different types of mutual funds and ensure a more uniform taxation approach.

Implications for Investors

These changes reflect a broader policy shift towards encouraging long-term investment horizons and reducing the speculative trading of mutual fund units. Investors will need to reassess their portfolios in light of the new tax implications, potentially shifting towards longer-term strategies to minimise tax liabilities. Financial advisors and fund managers will play a crucial role in helping investors navigate these changes and optimise their investment strategies accordingly.

The Union Budget 2024's changes to the mutual fund tax structure aim to promote a stable, long-term investment environment while simplifying the tax landscape for investors. These reforms are expected to enhance market transparency and align investment behaviors with the country's broader economic goals.

The author is the co-founder and executive director at Prime Wealth Finserv.

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