Finance Minister Nirmala Sitharaman announced a 20 per cent and 12.5 per cent tax rate for short-term and long-term capital gains tax, respectively, in the Union Budget FY2024-25. The STCG tax rate increased from 15 to 20 per cent, while the LTCG tax rate increased from 10 to 12.5 per cent. However, some believe it may have caused a double whammy for mutual fund investors.

The exemption limit for LTCG has been increased to Rs 1.25 lakh per annum.

Says Suneel Dasari, CEO of EZTax.in, a tax filing portal: “The surprise announcement from Budget 2024 pertains to changes in capital gain tax—the holding period and tax rates, which has resulted in significant confusion regarding mutual fund investments, thereby SIP investments.”

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Dasari highlights, “Any transfer from equity MFs will result in short-term capital gains if the holding period is less than 12 months, and the tax rate has been raised from 15 to 20 per cent. The LTCG would garner 12.5 per cent, an increase from the previous 10 per cent.”

He explains, “SIPs are a type of mutual fund, and the long- or short-term investment would be determined by the purchase value of the earliest unit. As a result, the additional capital gains tax will be imposed on both STCG and LTCG holding periods beginning on July 23, 2024.”

How Does It Affect Equity Mutual Funds?

Manas Chugh, a consultant at Osgan Consultants Private Limited, says, “Investors are of the opinion that this increase in taxation will be detrimental to their investing journey.”

He explains with the following example:

Purchase Date: June 1, 2022 & Selling Date: July 24, 2024 — Long Term Capital Gain

Purchase Date: December 1, 2023 & Selling Date: July 24, 2024 — Short Term Capital Gain

He concludes: “Therefore, the investor shall be liable for additional taxes in the new regulations announced under the Budget 2024.”

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However, Dasari said, “The long-term capital gains from SIP investments would not significantly impact taxes, as the exemption limit has been revised from Rs 1 lakh to Rs 1.25 lakh.” He believes this would be true for most small investors and salaried taxpayers who wish to diversify their portfolio via SIP.

Chugh adds, “In the case of debt mutual funds, there is no change in the taxation structure. The tax rate shall be according to the individual’s slab rate. However, the holding period to qualify as a long-term asset is now reduced from 36 months to 24 months in Budget 2024.”