Budget 2025: Will Simpler Taxation Encourage More People to Invest in Mutual Funds?
As the Union Budget 2025 is approaching, mutual fund investors are eager to hear about simpler tax rules. Finance Minister Nirmala Sitharaman will present the budget on February 1, 2025; many expect changes that would make mutual fund taxes easier to understand and encourage more people to invest.
Current Taxation on Mutual Funds
The mutual fund tax depends on whether the mutual fund is either an equity or debt mutual fund and the holding period. Within Budget 2024, the LTCG tax imposed on equity mutual funds became 12.5% from 10%, whereas the STCG tax increased from 15% to 20%.
Equity Mutual Funds
Equity mutual funds invest at least 65% of their assets in equity shares of domestic companies, and tax treatment is provided as under:
- STCG: The short-term capital gain on selling the units for a period of less than 12 months attracts a 20% taxation for transfer on or after July 23, 2024, and attracts 15% for any transfer done before this.
- Long-Term Capital Gains (LTCG): If units are held for over 12 months, then their capital gains are taxed at 12.5% on transfers made on or after July 23, 2024, and 10% on transfers made prior to this date.
Also, the tax exemption limit on LTCG is increased to Rs.1.25 lakh, compelling small investors to invest cautiously with a view to availing tax-free profit. A higher tax rate on short-term gains (STCG) can encourage investors to hold their investments for a longer time to get better tax benefits.
Debt funds, which invest less than 65% in stocks, saw big changes starting April 1, 2023.
Profits of units held for less than 36 months were taxed at slab rates, and profits of units held for more than 36 months were taxed at 20% with the indexation benefit. All profits, irrespective of the holding period, now have to be paid at the slab rate of the investor. Thus, tax liabilities for the debt mutual fund investor increase.
In the July 2024 budget, the definition of specified mutual funds was amended to include funds with at least 65% exposure to debt and money market instruments. The slab rate taxation is now applicable to such funds.
Gold ETFs, gold funds, and international equity funds, however, fall outside this category. Starting FY26, gold funds will qualify for LTCG tax treatment after 24 months, while gold ETFs will be eligible after 12 months. Funds with less than 65% in debt will continue to enjoy LTCG tax treatment at a 12.5% rate after 24 months.
Mutual fund investors desire tax rules to be simple and become more consistent. They propose tax rates should be uniform across various types of investments; for instance, international stocks should be treated similarly to domestic ones. However, they also advocate for debt funds to be regarded on par with gold funds.
The system in place currently, therefore, has resulted in confusion due to differences in tax rates as per the date of purchase and the type of funds. Most investors expect the government to eliminate such differences and make the tax structure uniform.
The Budget 2025 presents the government with a chance to ease tax rules for mutual funds, thus making investment more attractive. By eliminating complexity and adjusting tax rates, the Finance Minister can motivate retail participation in mutual funds and hence encourage long-term wealth creation among investors.
