In my previous post, I had shared how Budget 2024 has changed the capital gains taxation for various investments.
The changes to capital gains taxation can be summarized as follows:
- The long-term holding period for all listed assets shall be 12 months. “Listed” means listed on Indian stock exchanges.
- The long-term holding period for all unlisted assets shall be 24 months. Even assets listed on foreign stock exchanges shall be considered “unlisted”.
- Short Term gains shall be taxed at income tax slab rate. Long-term capital gains shall be taxed at 12.5%.
- The only exception: For stocks/equity funds/REIT/InVITs, short-term gains shall be taxed at 20% and long-term capital gains shall be taxed at 12.5%. Equity funds are those funds that hold at least 65% equity.
- Debt mutual funds/debt ETFs/market linked debentures/unlisted bonds and debentures shall NOT be eligible for long term capital gains, irrespective of holding period. Debt funds are mutual funds that hold at least 65% debt and money market investments.
- The concept of indexation for long-term capital gains has been done away with.
- The changes are prospective and will apply from July 23, 2024. Sales in FY2025 until July 22, 2024 shall be taxed at older rates.
Using the above seven points, you can figure out the taxation for any capital asset. While these changes may hurt many investors, Budget 2024 has simplified capital gains tax regime in a big way.
Here is the MF taxation after Budget 2024 changes.
The taxation of equity and debt funds is quite clear from the above charts.
In this post, I will focus on gold funds and foreign equity funds, where Budget 2024 has bought immense relief. Will also share how these changes have been brought in. Plus, gold mutual funds and foreign equity funds are not the only way to invest in the respective assets. Hence, I will also compare the taxation of these mutual funds against their respective alternatives.
For instance, you can take exposure to gold by buying physical gold/jewellery, gold MFs, gold ETFs, and Sovereign gold bonds.
However, before we go there, let’s rewind a bit, go back to March 2023, and see how things got so messed up for gold mutual funds and foreign equity funds.
March 2023: The Problems Section 50AA brought
In March 2023, the Govt. modified the taxation of debt mutual funds. This change was effected by introducing a new section in the Income Tax Act. Section 50AA.
This section 50AA merely stated the following:
Any capital gain arising out of sale of “specified mutual funds” bought after March 31, 2023, shall always be considered short-term capital gains.
Hence, units of “specified mutual fund” bought after March 31, 2023, will not be eligible for long-term capital gains taxation, irrespective of the holding period. Always short-term capital gains, whenever you sell.
Short-term gains from sale of capital assets (except equity) are taxed at your marginal tax rate (slab rate). Just like the interest income from bank fixed deposits. Since the intent was to bring the taxation of Debt MF gains in line with taxation of interest income from bank fixed deposits, this served the purpose.
With that change, you got grandfathering of units of “specified mutual funds” bought before March 31, 2023. Such units of “specified mutual funds” bought on or before March 31, 2023, will be eligible for long-term capital gains.
What are specified mutual funds?
Section 50AA defines that too.
I reproduce the definition verbatim.
“Specified Mutual Fund” means a Mutual Fund by whatever name called, where not more than thirty five per cent of its total proceeds is invested in the equity shares of domestic companies
Now, if the intent was to tax debt mutual funds in the same way as bank fixed deposits, this definition served the purpose. Debt mutual funds don’t own more than 35% domestic equity.
However, there are other categories of funds too that do not own more than 35% domestic equity.
- Gold funds/Gold ETFs/Gold FoF
- Foreign equity funds/ETFs/FoF: These funds primarily invest in stocks listed outside India.
Because of this definition of “specified mutual funds”, these funds got caught unnecessarily in this line of fire and got clubbed with debt mutual funds for taxation.
What has Budget 2024 changed?
- The Government has modified the definition of “specified mutual funds” in Section 50AA.
- Further, the holding period for an asset to quality as a long-term capital asset has changed. It is 12 years for listed assets and 24 months for unlisted. “Listed” means listed on Indian stock exchanges.
What is the new definition of “Specified Mutual funds”?
As per the Budget 2024 proposal, the new definition of “Specified mutual fund” is
- 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
- 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):
Important note: This new definition applies only from April 1, 2025 (new financial year).
To qualify as “specified mutual fund”, the fund must invest more than 65% of its total proceeds in debt and money market instruments.
Debt mutual funds will meet this condition.
Gold mutual funds and foreign equity funds won’t. Therefore, these funds will again be eligible for long-term capital gains taxation.
Hence, going forward, Gold mutual funds and foreign equity funds won’t fall under the category of “specified mutual funds”.
This is a big relief. The Government has simply undone the wrong done in March 2023.
However, it does not matter much because any mutual fund unit bought after March 31, 2023, would not have completed 2 years by March 31, 2025. Hence, such gains will only be eligible for short-term capital gain taxation (if you sell on or before March 31, 2025). The impact is only on gold ETFs and foreign equity ETFs listed in India, where the long-term holding period is 1 year.
Budget 2024: How will Foreign Equity Mutual Funds be taxed?
Now, with this change to definition of “specified mutual fund”, the tax treatment of foreign equity investments is almost at par with domestic equity investments. Until now, foreign equity investments used to be taxed like debt funds.
Long term capital gains on both domestic equity funds and foreign equity funds/ETFs/FoFs will be taxed at 12.5%.
Only 2 differences.
Firstly, only domestic equity investments have exempt LTCG of Rs 1.25 lacs. This exempt LTCG limit has only been enhanced in Budget 2024 from 1 lac to Rs 1.25 lacs per financial year.
Foreign equity investments don’t get the benefit of exempt LTCG.
Secondly, the holding period for LTCG for domestic equity mutual funds and stocks is 12 months. For most foreign equity investments, the holding period for LTCG is 24 months. The only exception is foreign equity ETFs listed in India. For such ETFs, the holding period for LTCG is 12 months.
If you use foreign equity funds in your portfolio, this is great development for you. In fact, with these announcements, the tax regime for foreign equity investments is as favourable than it has ever been.
How will Gold Mutual Funds, Gold ETFs, and SGBs be taxed?
The modification in definition of “specified mutual funds” gives relief to gold mutual funds and ETFs too. Going forward, gold mutual funds and ETFs will also be eligible for long term capital gains taxation.
For gold mutual funds, the long-term holding period will be 24 months, while it will be 12 months for gold ETFs (since ETFs are listed). And any long-term gains will be taxed at 12.5%.
The long-term holding period for physical gold stands reduced from 36 months to 24 months. And the LTCG tax rate changes from 20% (after indexation) to 12.5%.
The long-term holding period for SGBs reduces from 36 months to 12 months. Interest continues to be taxed at slab rate. Long-term gains will be taxed at 12.5% (instead of 20% after indexation). If you hold SGB until maturity (or redeem with RBI), any gains will be exempt from tax (as per Section 47).
Since the change in Section 50AA comes into effect from April 1, 2025, there are three date ranges in which you can sell.
- Sold until July 22, 2024
- Sold between July 23, 2024 and March 31, 2025
- Sold on or after April 1, 2025
Do these changes change your preferred way of investing in gold?
How Debt mutual funds will be taxed?
The Budget 2024 does not give any relief to debt mutual funds. In fact, since debt mutual funds do not really give high returns, the withdrawal of indexation benefit is unequivocally detrimental to debt MF investors. However, long term capital gains treatment was withdrawn from debt funds since April, 2023. Therefore, only the debt MF units bought on or before March 31, 2023 will be eligible for LTCG benefit. Now, for such units bought on or before March 31, 2023, the indexation benefit stands withdrawn and the capital gains on such units will be taxed at flat 12.5% without indexation.
Disclaimer: Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investment in securities market is subject to market risks. Read all the related documents carefully before investing.
This post is for education purpose alone and is NOT investment advice. This is not a recommendation to invest or NOT invest in any product. The securities, instruments, or indices quoted are for illustration only and are not recommendatory. My views may be biased, and I may choose not to focus on aspects that you consider important. Your financial goals may be different. You may have a different risk profile. You may be in a different life stage than I am in. Hence, you must NOT base your investment decisions based on my writings. There is no one-size-fits-all solution in investments. What may be a good investment for certain investors may NOT be good for others. And vice versa. Therefore, read and understand the product terms and conditions and consider your risk profile, requirements, and suitability before investing in any investment product or following an investment approach.
2 thoughts on “Budget 2024: How Mutual Funds (Equity, Debt, Gold, Foreign Equity) will be taxed?”
In your table for debt mutual funds (middle column of first table),
For Debt MF units bought before 31st March 2023-
For sale of Debt MF units on or after 1 Apr 2025, it is clear that taxation will be as per Budget 2024 new rates (12.5% if holding period of 2+ years, else STCG at slab rates)
But it is not clear what will be the taxation for sale of Debt MF units between 23 July to 31 March 2025 (For Debt MF units bought before 31st March 2023)
Debt funds didn’t get any relief in this budget. And even indexation benefit got withdrawn for units sold on or after July 23.
For debt MF units sold between July 23 2024 and March 31 2025,
1. Bought on or before March 31, 2023: 12.5% without indexation (holding period >2 years for debt MF, >1 for listed debt ETFs)
2. Bought after March 31, 2023: No concept of LTCG. Taxed as STCG at slab rate.