After Budget 2024, what are the new latest Mutual Fund Taxation FY 2024-25 / AY 2025-26? What are the latest TDS and Dividend Distribution Tax on Mutual Funds?
There is a big change in capital gain taxation rules in Budget 2024. I have already written few articles on the Budget 2024. You can refer to the same for further reference.
- Budget 2024 – NPS Vatsalya Scheme – Should you invest?
- Budget 2024 – Changes In Taxation Of Gold in India
- Budget 2024 – New Capital Gain Tax Rules And Rates
- Budget 2024 – 10 BIG changes impacting personal finance
- July 2024 Budget – New Income Tax Slab Rates FY 2024-25
I am sharing this post based on the Budget 2024 proposals on Mutual Fund Taxation FY 2024-25 / AY 2025-26. Regarding the taxation of mutual funds, three things matter to arrive at the tax rate. The first one is a type of mutual fund (based on the portfolio), the second one is a holding period (whether LTCG or STCG) and the third one is listed or unlisted. Let me explain all three important concepts in detail.
Types of Mutual Funds For Taxation After Budget 2024
After Budget 2024, there are now three types of Mutual Funds for taxation.
a) Equity Mutual Funds
If your fund is holding more than 65% of its portfolio in Indian stocks, then it is classified as Equity Mutual Funds. Also, if it is a Fund Of Fund (FOF), then the condition is that it invests 90% of its assets in funds that, in turn, invest 90% of its assets in domestic equity (like Equity ETFs).
b) Debt Mutual Funds
If your fund is holding more than 65% of its portfolio in Bonds or Money Market instruments, then it is specified as a debt mutual fund. This includes Debt Fund Of Funds. However, to be eligible for a Debt Mutual Fund, if such Fund of Fund invests a minimum of 65% of its assets in funds that, in turn, invest a minimum of 65% of its assets in debt and money market instruments. It means all debt funds will fall under this category.
c) All Other Mutual Funds
If any fund does not fall under the above-mentioned two categories, then they are considered as “Other Mutual Funds”.
Holding Periods of Mutual Funds
Along with the categorization of mutual funds as mentioned above, the holdings period of the mutual funds also matters a lot to arrive at the tax rate. Hence, understanding the holding periods of mutual funds is also most important.
a) For Equity Mutual Funds
For equity mutual funds, if the holding period is less than a year or 12 months, then the gain is considered as Short Term Capital Gain (STCG).
If the holding period is more than a year or 12 months, then the gain is considered as Long Term Capital Gain (STCG).
b) For Debt Mutual Funds
The holding period is not applicable for this category. No matter for how many years you hold, the taxation is same (explained later).
c) For Other Mutual Funds
If your holding period is less than two years or 24 months, then the gain is considered as Short Term Capital Gain (STCG) and if the holding period is more than two years or 24 months, then the gain is considered as Long Term Capital Gain (LTCG).
Listed Or Unlisted Mutual Funds
Previously, various holding periods (12 months/24 months/36 months) were required for different types of assets to be considered as long-term capital gains. There will now be two holding periods: 12 months and 24 months.
Listed securities – The holding period is 12 months or 1 year to qualify for LTCG. Securities eligible for these are as below.
- Stocks
- Equity Mutual Funds
- Equity ETFs
- Gold ETFs
- Bond ETFs
- Listed Bonds
- REITs
- InVIT
- Sovereign Gold Bonds (SGB)
Even though equity mutual funds are not listed in stock exchanges and not traded like stocks and ETFs, they are still considered as listed securities for the purpose of taxation.
Unlisted securities – The holding period is 24 months or 2 years to qualify for LTCG. Securities eligible for these are as below.
- Real Estate
- Physical Gold
- Gold Mutual Funds
- Unlisted Stocks (Indian or Abroad)
- Debt Mutual Funds (Units bought before 1st April 2023)
- Foreign Equity Funds
Budget 2024 – Mutual Fund Taxation FY 2024-25 / AY 2025-26
Based on three conditions, the Mutual Fund Taxation can be calculated as below.
Security Transaction Tax (STT) for FY 2024-25
Security Transaction Charges or STT is the charges or tax when you buy or sell securities (excluding commodities and currency) through a recognized stock exchange. Therefore,
The definition of securities involves the below products.
- Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
- Derivatives;
- units or any other instrument issued by any collective investment scheme to the investors in such schemes;
- Security receipt as defined in section 2(zg) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
- Government securities of equity nature;
- Rights or interest in securities;
- Equity-oriented mutual funds
Therefore, whenever you buy and sell these securities through a recognized stock exchange, then you have to pay this STT.
Now let us understand the latest Security Transaction Tax (STT) applicable for FY 2024-25
Conclusion – Noticed that the taxation is actually simplified from now onwards. Because, now only three categories of mutual funds, and the holding period is only two categories. Also, the calculation of indexation is off from now onwards. Even though certain confusion may be there for old investors who are holding the units before 23rd July 2024 and before 1st April 2023, future taxation is simplified.
Grandfathering of tax slab LTCG/STCG not existing anymore? What about my 10 years investment now?
Dear Rama,
You have to pay as per current tax rates.
The changes proposed re Debt Mutual funds relating to Long Term Capital Gains irrespective of holding period are totally unfair and retrospective in nature – many individuals especially older ones have been investing in debt mutual funds for obvious reasons. Many had purchased Target Maturity funds and FMPs based on the prevailing income tax laws then. Even last year’s budget when the changes were made only applied to fresh investments made after the said budget date but not to older investments but this time by applying the same on all sales made even on very old debt investments made considering the prevailing taxation structure is truly retrospective and unfair as far as long term retail individual investors are considered. They should have made the changes only for fresh investments made after the budget date.
Kindly use your good offices to take up the matter with various concerned to represent the same so that fair sense prevails.
Dear RP,
I totally agree with your views and sadly policymakers not understanding the difficulty of how people pay tax and in return no benefit from government.
Dear Sir, Are you sure that if Debt Mutual funds were bought before 1 April 2023 and held for more than 36 months then LTCG will be applicable at 12.5% and not at slab rate? The view given by most is that now if you sell any Debt MF irrespective when you have bought you have to pay LTCG at slab rate and not 12.5% Kindly confirm. Thanks
Dear RP,
Yes, whatever I have written is correct.
Sir, what about LTCG on sale of immovable property. It’s learnt that indexation benefits have been withdrawn.
But I have also read in news paper that property made/ purchased prior to 2001-02 will still be eligible for Indexation benefits,
I completed construction of my house partly( GF) in 1999 and completely finished in 2001.
Power connection were then in 1999 and for other floors in 2001.
If I sell it now , will I get indexation benefits ?
Dear Rajinder,
When you are selling the property matters a lot. If you sold the propery before 23rd July 2024, then Indexation is available. Otherwise, NO.
In my opinion, for properties also, grand-father should have been made applicable as happened in case of equity in 2018, where property acquired before 23rd July 2024 should have been given the benefit of indexation and old LTCG rate and property purchased on/after 23rd July 2024, new LTCG rules are applicable.
Dear Kamal,
Sadly this has not happened.