Part 2: Understanding Mutual Fund Taxation - Equity, Debt and Hybrid Mutual Funds
This article explains the taxation of equity, debt, and hybrid mutual funds post-Budget 2024, covering long-term and short-term capital gains, indexation benefits, and tax planning.
In the previous article Part 1: Understanding Mutual Fund Taxation - Dividend Taxation, we discussed the taxation of mutual fund dividends. Now, in this article, we will focus on how capital gains from different types of mutual funds (equity, debt, and hybrid) are taxed.
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Taxation of Equity Mutual Funds
Equity mutual funds are widely preferred for long-term wealth creation. However, tax treatment on capital gains has changed post-Budget 2024. The tax structure is as follows:
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Capital Gains Type
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Before Budget 2024
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After Budget 2024
|
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LTCG (Long-Term Capital Gains)
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Tax Rate: 10 per cent
Holding Period: Over 12 months
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Tax Rate: 12.5 per cent
Holding Period: Over 12 months
|
|
STCG (Short-Term Capital Gains)
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Tax Rate: 15 per cent
Holding Period: Less than 12 months
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Tax Rate: 20 per cent
Holding Period: Less than 12 months
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Despite the increased tax rates, equity mutual funds remain a tax-efficient investment choice for long-term investors.
Taxation of Debt Mutual Funds
Debt mutual funds are preferred by conservative investors for their stability. However, tax treatment has undergone significant changes after April 1, 2023.
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Purchase Date
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Redemption Date
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Holding Period
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Tax Rate
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Indexation Benefit
|
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Before April 1, 2023*
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Before July 23, 2024
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>36 months
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20.00 per cent
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Available
|
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Before April 1, 2023*
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On/After July 23, 2024
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>24 months
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12.50 per cent
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Not available
|
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On/After April 1, 2023
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Any redemption date
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Any holding period
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As per income tax slab rate
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Not applicable
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*For a holding period of less than 36 months or 24 months, as the case may be, gains are added to the taxable income and taxed as per the applicable slab rate.
Investors purchasing Debt Funds after April 1, 2023, no longer receive indexation benefits, making the tax treatment less favorable.
Taxation of Hybrid Mutual Funds
Hybrid mutual funds, which invest in a mix of equity and debt, offer a balanced investment approach. Their tax structure is as follows:
|
Capital Gains Type
|
Before Budget 2024
|
After Budget 2024
|
|
LTCG (Long-Term Capital Gains)
|
Tax Rate: 20 per cent
Holding Period: Over 36 months
With indexation benefits
|
Tax Rate: 12.5 per cent
Holding Period: Over 24 months
No indexation benefits
|
|
STCG (Short-Term Capital Gains)
|
Tax Rate: Income tax slab rate
Holding Period: Less than 36 months
|
Tax Rate: Income tax slab rate
Holding Period: Less than 24 months
|
With the removal of indexation benefits, hybrid mutual funds may offer slightly lower tax efficiency, but they remain a suitable option for investors seeking a balance between equity and debt.
Planning Based on Mutual Fund Taxation
Tax planning is essential to optimise returns. Investors should consider factors like holding periods and fund categories to reduce their tax burden efficiently.
Disclaimer: The article is for informational purposes only and not investment advice.