Sold your mutual funds this year? Here’s how Capital Gains Tax will hit you

If you redeemed your mutual fund investments this year, you should be aware of the new capital gains tax rules introduced on July 23, 2024. The revised taxation affects both equity and debt mutual funds, altering how gains are taxed depending on the type of fund and holding period. This change is significant for investors looking to maximise their returns amidst evolving tax regulations.

The changes for equity mutual funds, which comprise at least 65% equity exposure, include a new Long-Term Capital Gains (LTCG) tax rate of 12.5% on profits exceeding Rs 1.25 lakh, up from the previous 10% on profits over Rs 1 lakh. Short-Term Capital Gains (STCG) are now taxed at 20%, an increase from the earlier 15% for listed equity units. The differentiation between short-term and long-term gains remains, with short-term defined as holdings less than 12 months.

For non-equity and debt mutual funds, tax liability depends on the fund type, gain duration, income slab, and purchase date. For units bought post-March 31, 2023, all gains are considered short-term and taxed at slab rates, with no indexation benefits. This contrasts with the previous regime, where a 20% tax with indexation or 12.5% LTCG was applicable after two years.

Investors should note that dividends distributed by mutual funds are still taxable at the applicable slab rate, regardless of the fund type or duration of holding.

The introduction of a maximum surcharge cap on both LTCG and STCG at 15% under both tax regimes is an important aspect. However, income levels influence surcharges, with the old regime allowing up to 37% beyond ₹5 crore, while the new regime caps it at 25% beyond ₹2 crore. These differences necessitate careful consideration by investors.

Understanding the significance of the holding period and fund type is crucial as they determine tax obligations. The new holding period for LTCG on equity and aggressive hybrid funds is over 12 months, while debt and conservative hybrid funds are always subject to STCG after March 2023 purchases. Other hybrid funds with 35-65% equity allow LTCG taxation if held beyond 24 months, but at a 12.5% rate.

For those planning redemptions, strategic planning is essential. The higher STCG rate, loss of indexation, and fewer exemptions could reduce post-tax returns. Strategies such as staggering sales, smart use of exemption limits, and consulting a tax advisor can mitigate these impacts effectively.

With capital gains tax becoming steeper, informed planning remains vital for optimising profits. Understanding the nuances of these tax changes enables investors to manage their portfolio more efficiently, keeping more of their gains intact.

Capital Gains Tax on Mutual Funds (Effective July 23, 2024)