The Union Budget 2024 has altered the tax laws governing investments in mutual funds in a number of ways. Let's examine what this implies for you in detail:
Gains on Short-Term Capital (STCG)
Increased Tax: You will now be required to pay 20% tax on your gains if you sell your mutual fund units within a year of purchasing them. Previously, it was 15%. This implies that the tax on earnings for investors who hold mutual fund units for less than a year will increase. For instance, if you invested in a mutual fund for six months and achieved a profit of Rs. 10,000, your tax liability will now be Rs. 2,000 rather than Rs. 1,500.
Positive Updates for Small Investors: A tiny sense of relief comes. The maximum of Rs. 1.25 lakh was added to the tax-free amount on long-term capital gains (LTCG). You will not be required to pay tax if your profits are less than Rs. 1.25 lakh. It is preferable to hold onto your mutual fund investments for more than a year in order to save on taxes.
Debt Management
Short-Term Capital Gains: You will pay taxes in accordance with your income tax bracket if you sell your debt fund units within three years.
Long-Term Capital Gains: The tax rate on debt funds held for more than three years is now 12.5% flat, with no indexation advantages.
Investors have been hurt by the elimination of indexation benefits for debt funds. This implies that after three years, the whole gain from selling a debt fund will be subject to a fixed 12.5% tax rate. Slight Increase in Long-Term Capital Gains (LTCG): The 10% tax on gains from mutual funds that have been held for more than a year has been raised to 12.5%.
Gold Mutual Funds
Short-Term Capital Gains: The tax you pay will depend on your income tax bracket if you sell your gold fund units within three years.
Long-Term Capital Gains: The tax rate on gold funds held for more than three years is currently 12.5% flat, with no indexation advantages.
Fund of Funds (FoFs): The underlying funds determine the taxation: Mutual fund investments are made by FoFs. As a result, the tax consequences vary depending on the kind of funds the FoF invests in (mixtures of debt and equity).
Value Research elucidates the impact of recent tax regulations on your fund investments:
Stick to your strategy; higher taxes on stock gains will lower your post-tax returns. However, equity is still the strongest asset type for long-term investing. A tax decrease of 12.5% is applicable to international and gold funds as of April 1, 2025. Redemptions are subject to a marginal tax rate up to that point.
Hybrid funds' tax-free auto-rebalancing function keeps them shining. Because of their consistent asset allocation, Value Research favors aggressive hybrid and equity savings funds. It is said that the new tax regime inhibits savings by lessening the emphasis on Section 80C, as tax-saving investments frequently promote more extensive saving practices. It is a setback that the indexation benefit has been removed from all asset classes since inflation eats away at long-term investments.
