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The Union Budget 2024 has increased the tax rates on Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) for equity-oriented funds. As a result, a Systematic Investment Plan (SIP) of Rs 50,000 per month for 60 months in equity funds will now incur a higher capital gains tax of Rs 94,095, up from Rs 77,456 previously.
Changes in Capital Gains Tax Rates
The government has raised the STCG tax on equity mutual funds from 15 percent to 20 percent and the LTCG tax from 10 percent to 12.5 percent. However, to provide some relief, the exemption limit for LTCG tax has been increased to Rs 1.25 lakh from the previous Rs 1 lakh per financial year.
Effect on Mutual Fund Investors
These changes represent a double blow for mutual fund investors, who have consistently favored mutual funds to gain exposure to the stock market in India. Monthly SIP investments have remained above the Rs 20,000-crore mark since April 2024. The increased taxes will impact the returns on these investments.
Taxation of SIPs in Equity Funds
Each SIP installment is treated as a separate investment for tax purposes. For instance, if you invest Rs 10,000 per month in an equity mutual fund through SIPs, each installment will be considered separately to determine the holding period and applicable tax rate. Mutual fund investments follow a First-In-First-Out (FIFO) approach to determine the tax treatment of units redeemed.
Impact on Equity Funds
With the LTCG tax increasing from 10 percent to 12.5 percent, long-term investors will pay slightly higher taxes. However, small investors may benefit modestly from the increased exemption limit of Rs 1.25 lakh. The rise in STCG tax from 15 percent to 20 percent will affect short-term equity investors.
Despite these changes, equity mutual funds remain an attractive investment compared to other asset classes. Feroze Azeez, Deputy CEO of Anand Rathi Wealth, believes that the increased tax rates will not significantly affect the flow of investments into equity mutual funds.
Taxation of Debt Funds
The Union Budget has lowered the capital gains tax rate on gold funds, gold exchange-traded funds (ETFs), overseas funds, and funds of funds (FoFs). However, debt mutual funds will continue to be taxed at the normal income tax rate. Mutual funds investing more than 65 percent of their total proceeds in debt and money market instruments will fall under Section 50AA. ETFs, Gold Mutual Funds, and Gold ETFs will not be considered specified mutual funds.
Incentives for Long-Term Holdings
The widening gap between STCG and LTCG rates incentivizes longer-term holdings, aligning with the goal of creating sustainable wealth. This move also standardizes taxation across various asset classes, potentially simplifying the investment decision-making process for many investors, as noted by Rajarshi Dasgupta, Executive Director at AQUILAW.
In conclusion, while the increased taxes on capital gains from equity-oriented funds may result in higher tax outgo for SIP investors, equity mutual funds still offer competitive returns and remain a preferred investment route for exposure to the stock market in India.
