2024-08-01 06:16:59
Sudha Shrimali, Mumbai: Significant changes have been made in the tax rates of capital gains in the Union Budget 2024. These affect both short-term and long-term capital gains from equity and equity-oriented mutual funds. Let us know how much and what impact it will have on fund investors. Here we tell you that short term capital gain (STCG) applies to mutual fund investments held for a period of less than one year. At the same time, long term capital gain (LTCG) tax is applicable on investments held for a period of more than one year. In the budget, long term capital gain tax (LTCG) was increased from 10% to 12.5% and short term capital gain tax (STCG) from 15% to 20%. However, for mutual fund investors with a holding period of more than one year, the exemption limit has been increased from Rs 1 lakh to Rs 1.25 lakh.
Financial planner Kartik Jhaveri explains its impact on mutual fund earnings of Rs 5 lakh.
Scenario 1: Short Term Capital Gains Tax
If the entire Rs 5 lakh is treated as short term capital gain, 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 Gain Tax
Let’s assume that the entire Rs 5 lakh is treated as long term capital gain:
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 25,000
What impact will it have on which funds?
Edelweiss MD, CEO Radhika Gupta explained how the change in tax rates will affect mutual fund investors. Referring to the tax structure before Budget 2024, she said that mutual funds used to have different taxation categories. Some mutual funds were taxed according to long term and short term. Many funds were taxed according to marginal tax rate. Some mutual funds had the concept of indexation. However, this structure has been simplified in this budget. The concept of indexation is over.
Category 1: This is for equity mutual funds that have more than 65% equity. These are taxed as capital assets at 20 per cent in the short term and 12.5 per cent in the long term, with long term including anything held for more than a year.
Category 2: These are funds which hold more than 65% debt securities and are taxed at marginal rates, with no concept of short term and long term.
Category 3: These are funds that do not fit into any of the categories mentioned above – such as gold index funds or gold ETFs or equity funds or international funds or conservative hybrid or fund of funds investing in hybrid funds. These are taxed at the marginal rate in the short term and 12.5 per cent in the long term, with the long term being more than two years.
What will be the impact on your mutual fund investments?
According to Gupta, looking at the first category, short-term taxation in equity mutual funds has increased marginally from 15 per cent to 20 per cent. Long-term taxation has increased from 10 per cent to 12.5 per cent. He said, “You are in a slightly worse position there.”
There is no change in the impact on the second category of investments compared to last year. For the third category, long-term investors get a material benefit. They will be taxed at 12.5 per cent instead of the marginal rate of taxation applicable after last year’s budget. However, nothing has changed for short-term investors in this category.
Redemption will become expensive
Mutual fund expert Vijay Mantri said that the new tax regime looks simple, but it has a higher tax outgo. Due to the changes that have been made, redemption or withdrawal of investors will become expensive because the profit will be taxed up to 13% according to the slab as per consideration. Since tax is not calculated on the base rate at the time of selling, the investor will find it costly to withdraw money as a large amount of tax will be deducted. STT will also be applicable at the time of selling.
The holding period for equity 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. After all, there is no STT on unlisted shares and international mutual funds and the long term capital gains tax (LTCG) is also after two years, the minister said.