Understanding New Definition and Taxation Changes for “Specified Mutual Funds” under Finance Act 2024
The Finance Act, 2024 has introduced far-reaching changes in the definition of “Specified Mutual Fund” that will come into effect from 1st April 2025. The government is into streamlining and bringing clarity to mutual fund classification and its consequent taxation, which is heavily invested in debt and money market instruments.
What is a “Specified Mutual Fund” Under the New Rules?
From FY 2025-26 onwards, a specified mutual fund shall mean:
1. A mutual fund that invests above 65% of its total proceeds in debt and money market instruments.
2. A fund investing 65% or more of its total proceeds in units of another fund that invests most in debt and money market instruments.
It also prescribes that the computation of percentage of investment in debt and money market instruments shall be as an annual average of daily closing figures. Further, these instruments also include any securities which are treated or regulated as debt and money market instruments by SEBI.
This is a break from the previous definition of specified mutual funds, which had been more equity investment-based.
When Do the Tax Changes Take Effect?
While the new definition of specified mutual funds will be applicable from 1st April 2025, the changes in the rules of taxation come into effect much earlier, beginning from 23rd July 2024. This includes tax changes with regard to the period of holding and rates of STCG and LTCG.
According to the proposed tax rates under Budget 2024, such STCG and LTCG shall be taxed as under:
- Gains on holdings below 2 years would be taxed as per the slab rate.
- Gains from such holdings over 2 years will be taxed at the rate of 12.5%.
However, specified mutual funds shall also include such mutual funds as are defined up to 31st March 2025. This means a designated mutual fund would imply a mutual fund investing not more than 35% of its total proceeds in equity shares of domestic companies. The revised tax provisions, including holding period and tax rates, shall be applicable for mutual funds complying with this old definition from 23rd July 2024 to 31st March 2025.
What Does This Mean for Investors?
This makes investors’ life a bit more complicated. Certainly, for those heavily invested in debt-oriented funds, the new classification and, subsequently, the altered rules of taxation have to be considered with great care. The new definition shall apply from FY 2025-26 onwards, thereby affecting the classification of funds and their respective taxation, which in turn will affect investment decisions.
While the changes in defined mutual funds’ definition shall be applicable w.e.f. 1st April 2025, the revised taxation will come into effect from 23rd July 2024. Thus, investors must be tuned to these timelines for any informed financial decision in this regard.
