Explained: How new tax rules impact your mutual fund investments

The Union Budget 2024 introduced significant changes in the taxation of mutual funds, impacting both short-term and long-term capital gains.

Union Budget 2024 has introduced several changes to the tax rules for mutual fund investments. Let's break down what this means for you:

Short-Term Capital Gains (STCG)

Higher Tax: If you sell your mutual fund units within a year of buying them, you'll now pay a 20% tax on your profits. Earlier, it was 15%. This means investors holding mutual fund units for less than a year will now pay a higher tax on their profits.

Example: If you made a profit of Rs. 10,000 on a mutual fund you held for 6 months, you'll now pay Rs. 2,000 as tax instead of Rs. 1,500.

Long-Term Capital Gains (LTCG)

Slight Increase: The tax on profits from mutual funds held for more than a year has increased from 10% to 12.5%.

Good News for Small Investors: There's a little relief. The tax-free limit on LTCG has been raised from Rs. 1 lakh to Rs. 1.25 lakh. So, if your profits are below Rs. 1.25 lakh, you won't pay any tax. To save on taxes, it's better to stay invested in your mutual funds for more than a year.

Debt Funds

• Short-Term Capital Gains: If you sell your debt fund units within three years, the tax will be as per your income tax slab.
• Long-Term Capital Gains: For debt funds held for over three years, the tax rate is now a flat 12.5% without indexation benefits.
• The removal of indexation benefits for debt funds has impacted investors. This means that the entire gain from selling a debt fund after three years will be taxable at a flat rate of 12.5%.

Gold Funds

• Short-Term Capital Gains: If you sell your gold fund units within three years, the tax will be as per your income tax slab.
• Long-Term Capital Gains: For gold funds held over three years, the tax rate is now a flat 12.5% without indexation benefits.

Fund of Funds (FoFs)

Taxation depends on the underlying funds: FoFs invest in other mutual funds. Therefore, the tax implications depend on the type of funds the FoF invests in (equity, debt, or a mix).

Value Research explains how new taxation rules impact your fund investments:

• Higher taxes on equity gains will reduce your post-tax returns, but equity remains the best asset class for long-term investments, so stick to your plan. 
• International and gold funds benefit from a tax reduction to 12.5 per cent starting April 1, 2025. Until then, redemptions attract a marginal tax rate. 
•  Hybrid funds continue to shine with their tax-free auto-rebalancing feature. Value Research's preferred categories are aggressive hybrid and equity savings funds due to their stable asset allocation. 
• The new tax regime discourages savings by reducing the emphasis on Section 80C, which is disappointing as tax-saving investments often encourage broader saving habits.
• The removal of the indexation benefit from all asset classes is a setback, as inflation erodes long-term investments.