Budget 2024 – Mutual Fund Taxation FY 2024-25 / AY 2025-26

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.

1. Stocks
2. Equity Mutual Funds
3. Equity ETFs
4. Gold ETFs
5. Bond ETFs
6. Listed Bonds
7. REITs
8. InVIT
9. 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.

1. Real Estate
2. Physical Gold
3. Gold Mutual Funds
4. Unlisted Stocks (Indian or Abroad)
5. Debt Mutual Funds (Units bought before 1st April 2023)
6. 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.