Long Term Capital Gain Tax on Mutual Funds

The 2024 Union Budget has introduced significant changes to capital gains taxation, impacting mutual fund investments. With revised holding periods and tax rates for long-term capital gains (LTCG), investors face a new tax structure.

Here, we will examine the latest rules on LTCG tax on mutual funds in FY 2024-25.

According to the recent updates in the Union Budget 2024, the long-term capital gain tax on mutual funds rate is set at 12.5% for mutual funds, with no provision for indexation benefits.

Mutual Funds and Their Holding Periods

The mutual fund industry in India categorises funds into two broad groups: equity-oriented and debt-oriented funds. The classification is essential as it determines the tax treatment of gains from these investments.

1. Equity-Oriented Mutual Funds: These funds primarily invest in equities or stocks. If you hold an equity-oriented mutual fund for more than 12 months before selling, the profit qualifies as a long-term capital gain.
2. Debt-Oriented Mutual Funds: These funds invest in fixed-income securities like bonds, government securities and corporate debentures. You must hold debt-oriented funds for over 24 months to qualify for long-term capital gains.

How Mutual Funds Returns Are Taxed (Tax Rates)

Here is a breakdown of the current LTCG tax on mutual fund rates for different schemes, including equity-oriented and non-equity-oriented funds, to help you make informed investment decisions:

1. Equity-Oriented Schemes: The long-term capital gains from equity-oriented mutual funds are taxed at a rate of 12.5%. The government revised this tax rate in the Union Budget 2024 to encourage long-term investment in equities.
2. Non-Equity-Oriented Schemes: For non-equity-oriented funds, the long-term capital gains are also taxed at 12.5%, down from the previous rate of 20%. 

How to Avoid LTCG Tax on Mutual Funds (Exemptions)

The Income Tax Act provides certain exemptions and deductions that can help reduce the tax liability on long-term capital gains from mutual funds:

• Threshold Limit: For equity-oriented mutual funds, gains up to ₹1.25 lakh in a financial year are exempt from tax. Only gains exceeding this threshold, are subject to the 12.5% LTCG tax.
• Section 54EC: Capital gains of up to ₹50 lakhs from the sale of a long-term asset can be exempted if the proceeds are invested in specified bonds within 6 months.

Understanding these aspects of LTCG tax on mutual funds is crucial for investors. It enables them to make informed decisions about when to sell their investments and optimise their tax liabilities.

By being aware of the holding periods, applicable tax rates and exemptions, you can better plan your investment strategies and maximise your after-tax returns.

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