Following the Union Budget 2024-25, investors need to understand how their investments including mutual funds through Systematic Investment Plans (SIPs), will be taxed. This blog will cover all the changes made in the Union Budget 2024 that impact how mutual funds will be taxed. Before we explore the tax changes, take a minute to understand the fundamentals of mutual funds and SIPs
What Are Mutual Funds?
Think of a mutual fund as a big pot where investors pool their money together. This money is then used to buy a variety of investments, such as stocks, bonds or other assets as per the goals set for the mutual fund. These investments are looked after by a fund manager with years of market experience. This also helps investors spread out risk as mutual funds invest in a variety of assets giving rise to the benefits of diversification.
What Is SIP?
Systematic Investment Plan (SIP) is a popular investment strategy that helps investors invest in mutual funds with a disciplined approach. Under SIPs, investors can invest small fixed amounts at intervals of their choice, say monthly or weekly, into a chosen mutual fund. Over time, this helps them invest regularly and also helps investors build wealth through the power of compounding.
For example, an investor starts a monthly SIP of ₹2000 in an equity mutual fund and continues to invest for 10 years. Let’s assume that the equity mutual fund provides a yearly return of 12%. In this situation, his total investment investment over 10 years is just ₹2,40,000, but thanks to compounding, this amount would have increased to ₹4,64,678.
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What Are The Different Mutual Funds On The Type of Holding?
There are three types of mutual funds when it comes to their holding type:
1. Equity Mutual Funds: Funds that have more than 65% of their investments invested in equity shares of companies are considered equity mutual funds.
2. Debt Mutual Funds: Such funds have investments of more than 65% in debt-oriented instruments.
3. Hybrid Mutual Funds: These funds have their investments from 35% to 64% in debt instruments.
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How Are Mutual Funds Taxed?
Mutual funds are taxed based on the type of fund and the duration for which they are held. Equity mutual funds are taxed differently from debt mutual funds. The tax also depends on whether the gains are short-term or long-term.
Here is a table that can help you understand how different mutual funds will taxed after the Budget 2024-25:
| Equity Mutual Funds | Debt Mutual Funds | Other Mutual Funds* | ||||
|---|---|---|---|---|---|---|
| Pre-Budget | Post-Budget | Pre-Budget | Post-Budget | Pre-Budget | Post-Budget | |
| Minimum Holding Period for Gains on Mutual Fund to be termed as long-term | 12 months | 12 months | 36 months | 24 months | 36 months | 24 months |
| Tax on Short-Term Capital Gains (STCGs) | 15% | 20% | Tax Slab Rate | Tax Slab Rate | Tax Slab Rate | Tax Slab Rate |
| Tax on Long-Term Capital Gains (LTCGs) | 10% | 12.5% | Tax Slab Rate With Indexation | Tax Slab Rate With Indexation | Tax Slab Rate With Indexation | 12.5% |
*This includes hybrid mutual funds and Gold Mutual Funds.
How Has Budget 2024-25 Changed The Mutual Funds Tax Structure?
After the Union Budget 2024, there have been major changes to the tax structure for mutual funds. The following changes have been announced:
1. Short-Term Capital Gains: Short-term gains on specified financial assets, including mutual funds, will now be subject to a 20% tax rate, increased from the previous 15%. This will be effective from 23 July 2024.
2. Long-Term Capital Gains: The tax rate for long-term gains on all financial and non-financial assets has been increased to 12.5%. This change affects long-term capital gains from mutual funds and other financial assets.
3. Exemption Limit For LTCG: Previously the threshold limit for exemption of LTCG tax was up to ₹1 lakh which means that if your long-term gains are below ₹1 lakh, this income is exempt from taxation. But after the budget, this limit has now increased to ₹1.25 lakh.
Are There Any Changes In The Taxation Of Debt Mutual Funds?
The Budget 2024 has not changed how capital gains are taxed on debt funds. Debt mutual funds will include all schemes that have more than 65% of their investments in debt. Debt mutual funds will continue to be taxed at your slab rates.
How Can I Reduce My Tax Liability On Gains From SIP Investments?
One way to reduce tax liability on SIPs is by holding your SIP investments in equity mutual funds for over a year to avail of the LTCG tax benefit. If you hold an equity mutual fund for less than a year, your SIP attracts an STCG tax of 20%. However, if you hold it for more than a year, you only have to pay an LTCG tax rate of 12.5%.
Wrapping Up
The Budget 2024-25 has brought many changes to how any gains on mutual funds will be taxed from now. Hence, it is important for investors to stay informed and updated on mutual fund taxation to plan their future SIP investments and reduce tax liabilities from mutual funds.
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DISCLAIMER: Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investments in securities market are subject to market risks. Read all the related documents carefully before investing. The securities quoted are for illustration only and are not recommendatory.
