The Union Budget 2024, presented in July this year, introduced some major changes to the tax rules for mutual fund investments, impacting both short-term and long-term capital gains. Investors selling mutual fund units within a year will now face a higher tax rate on their profits. For those holding investments for over a year, the tax on long-term capital gains has slightly increased. However, small investors will benefit from a raised tax-free limit on long-term capital gains, now set at Rs 1.25 lakh.
Mohammed Chokhawala, a tax expert at ClearTax, explains the changes in taxation rules introduced in the Union Budget that affect mutual fund investments.
Taxation on mutual funds in India varies based on the type of mutual fund (equity and debt) and the duration for which the investment is held, he said adding that each type of mutual fund is subject to different rules for calculating capital gains and tax liabilities. “For instance, equity mutual funds and debt mutual funds have distinct holding periods that determine whether the gains are categorized as short-term or long-term, with varying tax rates applicable to each.”
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Understanding these differences is essential for investors to maximize returns while minimizing their tax burden, he stressed as he explained tax implications on various types of funds.
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Income Tax Implications on Equity Mutual Funds:
Short-Term Capital Gains (STCG): Gains from the sale of equity mutual fund units held for less than 12 months are classified as Short-Term Capital Gains (STCG). These gains are taxed at 20% for transfers occurring on or after 23rd July 2024 and at 15% for transfers made before this date.
Long-Term Capital Gains (LTCG): Gains from the sale of equity mutual fund units held for over 12 months are classified as Long-Term Capital Gains (LTCG).
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