Last Updated on July 24, 2024 at 3:01 pm
Budget 2024 has proposed big changes in mutual fund tax rules. There are now three types of mutual funds: (1) Equity MF (65% or more domestic equity),(2) Debt MF (65% or more bonds). (3) Other MF (neither 65% equity nor 65% bonds)
1 Equity mutual funds (65% or more domestic equity)
New rule: long-term capital gains exceeding one lakh twenty-five thousand rupees will be taxed at 12.5% for redemptions made on or after 23rd July 2024. Holding Period 1Y and above.
New Rule: short-term capital gains will be taxed at 20% for redemptions made on or after 23rd July 2024. Holding Period less than 1Y.
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2 Debt Mutual funds with more than 65% bonds in the portfolio:
Redefined ruled: All gains taxed as per slab. See below for details.
Example: Parag Parikh Conservative Hybrid Fund
3 Other Mutual funds (less than 65% bonds and less than 65% equity in the portfolio)
New rule: long-term capital gains will be taxed at 12.5% without indexation for redemptions made on or after 23rd July 2024. Holding Period 2Y and above.
Example: Parag Parikh Dynamic Equity. Gold ETFs, FOFs etc.
STCG will be as per slab. Holding Period less than 2Y
So other than debt funds (defined now as holding 65% bonds) all MF LTCG is at the same rate. Only benefit is equity MFs have 1.25L tax free limit.
Update: See this guide for all asset classes with examples: Budget 2024 Capital Gains Taxation Guide
Explanation for debt fund and other funds taxation.
Budget 2024 modified the definition of “specified mutual funds” to clarify debt mutual fund taxation.
Context: A new IT section 50AA was introduced in 2023 which states that the gains on “Specified Mutual Fund” shall be deemed as short-term capital gains, irrespective of the period of holding, and the same will be taxable at the applicable
rates.
Old definition of “Specified Mutual Fund”: Funds holding not more than 35% domestic equity. So debt funds are specified mutual funds
Budget 2024 has modified this definition
New definition of “Specified Mutual Fund” as per Budget 2024
“(a) a Mutual Fund by whatever name called, which invests more than sixty five
per cent of its total proceeds in debt and money market instruments; or
(b) a fund which invests sixty five per cent or more of its total proceeds in units of
a fund referred to in sub-clause (a).
The above amendment under clause (ii) of Explanation of section 50AA is proposed
to be brought into effect from 1st day of April, 2026 and shall be applicable from AY
2026-27 onwards”. The tax rule change will apply from 23rd July 2024.
Thus any fund holding more than 65% bonds or a fund of fund that invest in such a debt fund will be taxed as per slab.
A fund holding less than 65% bonds and less than 65% equity will be subject to 12.5% LTCG tax without indexation by this definition.
Our understanding is: Exchange Traded Funds (ETFs), Gold Mutual Funds and Gold ETFs and fund of funds which hold funds that invest in less than 65% equity will also be subject to 12.5% LTCG tax without indexation by this definition. STCG will be as per slab.
This is an emerging story. The article will be updated as when there is more clarity.
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