The Union Budget 2024 introduced significant revisions to capital gains tax rates, affecting both short-term and long-term capital gains from equity and equity-oriented mutual funds. This overhaul of the capital gains tax framework is expected to influence investment decisions and financial planning, promoting a more balanced and equitable approach to taxation.
Capital Gains on Mutual Funds
Two key changes were announced regarding capital gains tax rates that will impact mutual fund investors’ returns. The long-term capital gains tax (LTCG) has been increased from 10% to 12.5%, while the short-term capital gains tax (STCG) has risen from 15% to 20%.
However, mutual fund investors holding their investments for over a year will benefit from a raised exemption limit, now increased from Rs 1 lakh to Rs 1.25 lakh.
STCG applies to mutual fund investments held for less than one year, while LTCG applies to those held for more than one year.
New Rules;
Taxation:
For equity mutual funds, gains are classified as short-term capital gains (STCG) if held for 12 months or less. If held for more than 12 months, they are considered long-term capital gains (LTCG).
STCG: 20% (for holdings of 1 year or less)
LTCG: 12.5% (on gains exceeding Rs 1.25 lakh for holdings over 1 year)
For debt mutual funds, taxation follows the investor’s applicable tax slab, regardless of the holding period.
Gains from other mutual funds are considered short-term if held for less than 24 months and long-term if held for more than 24 months.
Short-Term Capital Gains Tax On Mutual Fund
- Previously taxed at 15%.
- Now taxed at a flat 20% irrespective of the income tax slab.
Long-Term Capital Gains Tax On Mutual Funds
- Previously taxed at 10% with indexation benefits for gains exceeding Rs 1 lakh.
- Now taxed at a flat 12.5% without indexation benefits, with an exemption limit of Rs 1.25 lakh.
Impact on Rs 5 Lakh Mutual Fund Earnings
Scenario 1: Short-Term Capital Gains
If the entire Rs 5 lakh is considered as short-term capital gains, the tax liability will be:
Before Budget 2024: 15% of Rs 5 lakh = Rs 75,000
After Budget 2024: 20% of Rs 5 lakh = Rs 1,00,000
Increase in tax liability: Rs 25,000
Scenario 2: Long-Term Capital Gains
Assuming the entire Rs 5 lakh is considered as long-term capital gains:
Before Budget 2024: Taxable income = Rs 5 lakh – Rs 1 lakh (exemption) = Rs 4 lakh.
Tax = 10% of Rs 4 lakh = Rs 40,000
After Budget 2024: Taxable income = Rs 5 lakh – Rs 1.25 lakh (exemption) = Rs 3.75 lakh.
Tax = 12.5% of Rs 3.75 lakh = Rs 46,875
Increase in tax liability: Rs 6,875
Key Points to Remember
- The new tax regime is more straightforward but generally results in higher tax outgo.
- The holding period for equity-oriented mutual funds to qualify as long-term is still 12 months.
- Indexation benefits are no longer available for long-term capital gains.
- The exemption limit for long-term capital gains has been reduced.
It is essential to evaluate your specific financial situation and consider consulting with a tax professional to understand the implications of these changes on your overall tax liability.
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