Planning to redeem MFs? AY 2025-26 tax rules may hit your returns

Debt, equity, gold or international funds: Know the new tax rules for AY 2025-26 and how timing your redemptions can save you money, says experts

A slew of tax changes, effective from July 23, 2024, has altered how your mutual fund gains will be taxed in Assessment Year (AY) 2025–26. From higher long-term capital gains (LTCG) taxes on equity mutual funds to the removal of indexation benefits on older debt funds, investors now need to rethink their strategies. Experts say the timing of redemptions and choice of funds could have a noticeable impact on post-tax returns.

 

Redeeming before or after July 23: Why timing matters

 

Col Sanjeev Govila (retd), certified financial planner and chief executive officer of Hum Fauji Initiatives, a financial advisory firm, says that hesitation could cost investors more in taxes.

 

-Equity MFs: Suppose Rohan invested Rs 10 lakh in July 2021 and sells for Rs 16 lakh.

 

-Before July 23: LTCG tax is 10 per cent after Rs 1.25 lakh exemption, resulting in Rs 47,500 tax.

 

-After July 23: Tax rate rises to 12.5 per cent, increasing tax to Rs 59,375.

 

-Debt MFs (bought before April 1, 2023): Priya invested Rs 10 lakh, now worth Rs 16 lakh.

 

-Before July 23: Indexation reduces taxable gain to Rs 3 lakh; tax = Rs 60,000.

 

-After July 23: No indexation; full Rs 6 lakh taxed at 12.5 per cent, i.e., Rs 75,000.

 

“The loss of indexation means debt funds are now less nuanced and more expensive tax-wise,” Govila explains.

SIPs now have split tax personalities

Each SIP instalment is treated separately, and taxation depends on its purchase date. Govila says:

 

-SIPs before April 1, 2023: Debt fund units held >2 years taxed at 12.5 per cent LTCG.

 

-SIPs after April 1, 2023: Entirely taxed at slab rate, irrespective of holding period.

 

For example, Arun, investing Rs 5,000/month since 2022, will find his older debt SIPs taxed favourably compared to those started later.

 

A new six-way tax split

Vivek Jalan, partner, Tax Connect Advisory Services LLP, suggests splitting SIP investments into six categories for clarity:

 

-Bought on/before Mar 31, 2023; sold before July 23, 2024; held <36 months – STCG, taxed at slab rate

 

-Bought on/before Mar 31, 2023; sold before July 23, 2024; held >36 months – LTCG, 20% with indexation

 

-Bought on/after Apr 1, 2023; sold before July 23, 2024 – Taxed at slab rate

 

-Bought on/before Mar 31, 2023; sold after July 23, 2024; held <2 years – STCG, taxed at slab rate

 

-Bought on/before Mar 31, 2023; sold after July 23, 2024; held >2 years – LTCG, 12.5% without indexation

 

-Bought on/after Apr 1, 2023; sold after July 23, 2024 – Taxed at slab rate

 

“Debt mutual funds sold after July 23, 2024, will no longer enjoy indexation. This flat LTCG of 12.5 per cent could hurt long-term investors,” Jalan says.

 

Gold and international funds: Strategic, not tax-smart

Chintak Shah, vice president, Anand Rathi Wealth Ltd., points out that gold and international funds have also lost their earlier edge.

 

“These funds were taxed at 20 per cent with indexation if held for over three years. Now, they’re considered long-term after two years but taxed flat at 12.5 per cent, with no indexation,” Shah explains.

 

Whether this is good or bad depends on returns.

 

“If such funds deliver over 9.5 per cent annual returns, the new regime is more favourable. Otherwise, the old system would have been better,” Shah adds.