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Budget & MFs: What You Must Know

July 24, 2024 11:56 IST

While the minimum holding period for LTCG taxation has now been lowered, the tax outgo could be a bit higher under the new structure.

Illustration: Dominic Xavier/Rediff.com
 

Gold and silver exchange traded funds (ETFs), equity and hybrid fund of funds (FoFs) and international schemes will again qualify for long-term capital gains (LTCG) tax benefits.

These schemes, which used to enjoy indexation benefits, lost the LTCG advantage in March 2023 after they got bucketed as debt funds.

According to Budget documents, mutual fund (MF) offerings, other than those that are equity or debt-oriented, will now qualify for long-term capital gains taxation of 12.5 per cent if held for over 24 months.

At present, gold and silver ETFs and index funds, equity-oriented or hybrid fund of funds (FoFs) and international schemes are taxed at the investors' income tax slab rate.

The change is likely to become effective on redemptions post April 1, 2026. According to MF officials, these offerings had unintentionally got classified as debt funds last year and this budget makes a course correction.

In 2023, the government had said that any MF scheme which invests less than 35 per cent of its corpus in domestic equities will no longer enjoy indexation benefits.

The tax on such schemes was brought at par with bank deposits, which is the individual slab rate.

The tax change was primarily targeted at debt MF schemes, however, all MF offerings with less than 35 per cent exposure to domestic equities ended up losing the tax benefits.

In the 2024 Budget, the definition of debt funds has been changed again to 'schemes which invest more than 65 per cent of its total proceeds in debt and money market instruments'.

"The definition of specified MFs has, however, been amended and now applies only to MFs which invest more than 65 per cent of its total proceeds in debt and money market instruments," noted Rajesh Gandhi, Partner, Deloitte India.

"This will benefit mutual funds investing in gold, offshore securities or funds of funds as well as offshore mutual funds where the redemption proceeds will not be deemed to be short term gains now," Gandhi added.

Industry body the Association of Mutual Funds in India (Amfi) had called for such changes in its Budget proposals.

'We are happy to note that Amfi's demand of change in definition of 'Specified Mutual Funds' under Section 50AA has been acceded to and will lead to rationalisation in taxation for the funds affected hitherto,' the industry commented on the Budget.

In addition, the removal of indexation benefits for all asset classes will also impact some of the newly-launched hybrid funds, especially in the multi-asset category. These new schemes, which invest 35 to 64 per cent of the corpus in domestic equities, will now qualify for 12.5 per cent long-term capital gains tax if held for over two years.

In case the holding period is less than that, the gains will be taxed at the investor's income tax slab rate.

So far, they were taxed at 20 per cent after indexation if held for more than three years.

According to experts, while the minimum holding period for LTCG taxation has now been lowered, the tax outgo could be a bit higher under the new structure.

The tax burden will also go up in the case of equity-oriented schemes as the government has raised the long-term capital gains tax from 10 per cent to 12.5 per cent.

Debt MF offerings will continue to be taxed at the investor's slab rate irrespective of the holding period.

"There has been no change to the tax rates for debt mutual funds. Therefore, there is no material impact on debt mutual fund investors. We do not see any significant impact on flows into debt mutual funds," said Prashant Pimple, CIO, Fixed Income, Baroda BNP Paribas MF.

"The clarification removes funds like Gold ETFs and other commodities going out of the ambit of being classified as specified mutual funds (similar to debt funds) -- this is a welcome move and will bring more clarity to investors in Gold and other commodity funds."


Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.

Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Abhishek Kumar