Mutual Fund Investments to be Taxed in Financial Year 2025; Know How?
With the close of the financial year 2024-25 (FY25), mutual fund investors should be aware of tax laws for investing in mutual funds. There are recent changes in the taxation of debt and equity mutual funds that impacted the classification as well as the taxing of gains. This is the complete guide to the current regime of taxation on mutual funds.
Taxation of Equity Mutual Funds
Equity mutual funds are schemes that invest at least 65% of their corpus in equity stocks of domestic companies. Such funds are taxed based on the time for which the units are held.
- Short-Term Capital Gains (STCG): If the units are redeemed within 12 months of the investment date, the gains are considered short-term. Under Section 111A of the Income-tax Act, 1961, STCG on equity mutual funds is taxed at 15% in case of transfers up to July 23, 2024. But in the case of transfers from this date, the tax rate has increased to 20%.
- Long-Term Capital Gains (LTCG): For units held for more than 12 months, the gain is classified as long-term. As per Section 112A, LTCG above Rs.1,25,000 is taxable at a rate of 10% on transfers before July 23, 2024. From that date, the rate has been revised to 12.5%, provided the transfer is eligible for Securities Transaction Tax (STT).
Taxation of Debt Mutual Funds
The tax regime of debt mutual funds varies on whether the investment was done before or after April 1, 2023.
- Prior to April 1, 2023 investments:
- Short-Term Capital Gains: When units are retained for a period of 36 months or less, gains are treated as a part of the overall income of the investor and taxed at the rate of the respective income tax slab.
- Long-Term Capital Gains: If the units are being held for a period exceeding 36 months, then the gains are taxable at 20% with the advantage of indexation.
- In the case of Investments on or after April 1, 2023: Section 50AA was introduced by the Finance Act 2023, and it applies in the case of notified mutual funds where not exceeding 35% of the total proceeds are utilized in equity shares of domestic companies. Under this provision, all gains on such funds are considered short-term capital gains, regardless of the duration of holding. Hence, they are taxed at the investor’s applicable income tax slab rate.
Recent Budgetary Highlights
Union Budget 2025 did not introduce any alteration to the composition of capital gains tax for mutual funds. However, alterations of previous budgets are still impactful in shaping the current tax regime. A significant revision is the enhancement of the exemption limit on certain financial instruments from Rs.1 lakh to Rs.1.25 lakh per annum.
Knowledge of the tax implications of mutual fund investments is essential for good financial planning. Since tax rates keep on varying over time, investors must keep themselves informed of the current rules to avoid non-compliance and minimise their tax burden. Investors can benefit from advice from financial professionals to bring their investment planning in line with their tax responsibilities, which would result in efficient portfolio management.
