The Union Budget 2024 introduced notable changes in mutual fund taxation, particularly regarding long term capital gain tax on mutual funds. For Indian investors, this update reshapes the tax landscape, impacting how gains from mutual fund investments are calculated and taxed. As mutual funds remain a popular choice for building long-term wealth, it is crucial to understand how LTCG tax applies and how to optimise investment strategies under the new regime.
What is LTCG and how is it calculated?
Before diving deeper, let us answer the basic question: what is LTCG? LTCG stands for long term capital gain, referring to the profit earned from selling a capital asset (such as mutual fund units) after holding it for a certain period. The LTCG tax is the amount you pay to the government on such gains. In the context of mutual funds, what is LTCG tax depends on the type of mutual fund and the duration for which it is held. The Union Budget 2024 has streamlined the LTCG framework. As per the new rules:
- Equity-oriented funds attract LTCG tax if held for more than 12 months.
- Debt-oriented funds qualify for long-term capital gains if held for more than 24 months.
The tax rate for both categories is now uniform at 12.5%, without any indexation benefits, marking a significant shift from earlier provisions.
Taxation on equity vs debt mutual funds
The type of mutual fund you invest in influences the holding period requirement and the applicable tax rates.
Equity-oriented mutual funds
These funds invest predominantly in stocks. If held for more than a year, gains from equity funds are classified as long term capital gain on mutual fund investments. Under the revised 2024 tax rules: LTCG tax on mutual fund returns (equity) is 12.5%. Long term capital gain tax exemption of up to INR 1.25 lakh per financial year is available. Any gains beyond this threshold are taxable.
Debt-oriented mutual funds
These funds invest in fixed-income instruments such as bonds and government securities. For them, gains become long-term only after 24 months. The applicable LTCG tax is also 12.5%, reduced from the previous 20%. However, unlike in the past, indexation is no longer applicable for debt funds.
Specified mutual funds
As per the Budget 2023 amendments, specified mutual funds—those investing over 65% in debt and money market instruments—will now be taxed differently. For investments made on or after 1st April 2023, any gains will be treated as short-term capital gains and taxed as per the investor’s income tax slab, regardless of the holding period. Indexation benefits are no longer available. However, for investments made before 1st April 2023, gains will still be considered long-term if held for over 24 months and taxed at 12.5%, but without indexation benefits[1].
[1] https://cleartax.in/s/tax-on-debt-funds
This standardization simplifies tax on mutual funds, but also reduces potential tax efficiency for conservative investors.
Impact of LTCG on your investment strategy
Changes in long term capital gain tax on mutual funds require a reassessment of how investors approach long-term investing. Whether you are investing in equity or debt schemes, understanding the tax implications can help shape your strategy to maximise post-tax returns.
- For SIP investors, the tax treatment follows a “first-in, first-out” basis, meaning each SIP instalment is treated as a fresh investment. Therefore, only instalments held beyond the qualifying period (12 or 24 months) will be subject to LTCG tax.
- Use tools like a SIP Calculator to estimate maturity values, plan investment horizons, and calculate the tax impact. This can help in spreading withdrawals strategically to stay within the long-term capital gain tax exemption
Ways to minimise LTCG Tax
While the new tax regime applies at a flat rate, investors can still minimise their tax liability through legal strategies:
- Make use of exemptions: For equity mutual funds, the annual INR 25 lakh exemption can be effectively used by redeeming investments in a staggered manner over multiple years.
- Reinvest in specified bonds: Under Section 54EC, if you earn capital gains from non-equity mutual funds, you may be eligible for exemption by investing the gains in notified bonds within six months.
- Switching to tax-efficient funds: Some funds may offer dividend reinvestment or growth options that align better with your financial goals while managing taxable events.
- Plan redemptions smartly: Avoid redeeming large amounts at once. Consider breaking withdrawals into smaller lots over financial years to stay within exemption limits.
By aligning investment decisions with these tax considerations, one can optimise the overall portfolio returns under the current mutual fund taxation system.
Conclusion
The revised long term capital gain tax on mutual funds for FY 2024-25 brings clarity but also calls for strategic financial planning. Understanding what is LTCG tax, how it is applied across different fund types, and how to leverage available exemptions is essential for every investor. With both equity and debt mutual funds now taxed at a uniform rate of 12.5%, investors must focus more on aligning investments with long-term goals rather than short-term tax savings. By using tools like a SIP Calculator, staying informed about tax on mutual funds, and optimising redemptions, one can maintain efficiency in wealth creation while complying with tax norms.
As tax structures evolve, so must investor awareness and adaptability. Long-term success lies in planning ahead, reviewing portfolios periodically, and ensuring tax liabilities don’t erode the gains from disciplined investing.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME-RELATED DOCUMENTS CAREFULLY
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
