Capital asset typically refers to anything that you own for personal or investment purposes. It includes all kinds of property; movable or immovable, tangible or intangible, fixed or circulating.
Capital assets are further classified as Financial Assets and Non-Financial Assets. Financial assets are intangible and represent the monetary value of a physical item.
Stocks (Shares) and mutual funds are the best examples of Financial Assets.
The profit (if any) that you make on your mutual fund investments when you redeem or sell the MF units is referred to as Capital Gains. It can be a Short Term Capital Gain (STCG) or a Long Term Capital Gain (LTCG) depending upon the ‘Period of Holding’. The tax that is applicable on these profits is known as ‘Capital Gains Tax’.
In this post let us understand: What are the new amendments applicable on Mutual Funds as per Budget 2023? What are the factors that determine the tax status of mutual funds? What are the capital gain tax implications on equity and non-equity oriented mutual fund investments? What are the Mutual Funds Taxation Rules FY 2023-24? Is TDS applicable on Mutual Fund Capital Gains from AY 2024-25? What are the capital gains tax rates on mutual funds for Financial year 2023-2024 (Assessment year 2024-2025).
Budget 2023 & Latest Mutual Funds Taxation Rules
As per Budget 2023, no indexation benefit is available while calculating long-term capital gains on Specified Mutual Fund (i.e a mutual fund which invests less than 35% of its proceeds in the equity shares of domestic companies). We can consider these specified funds as pure Debt oriented funds and any gains (STCG or LTCG) on these are now taxed as per income tax slab rate. This new rule is applicable for investments made on or after April 1, 2023 only.
Related Article : What is Indexation of Mutual Funds and why is it important for you?
With this new amendment, we now have three broad type of funds – Equity, Non-Equity & Specified Funds.
|Percentage of Equity Exposure||0% to 35%||36% to 64%||65% & more|
|Type of Fund||Specified Fund||Non-Equity oriented Fund||Equity Mutual Fund|
Factors determining the Capital Gains tax rate of Mutual Funds
The capital gains tax rate on mutual fund redemptions is based on the below three factors;
- Residential Status
- Fund Type (whether the fund is an Equit, Specified or Non-Equity)
- Holding Period (Duration of your investment)
1. Residential Status & Mutual Funds Taxation
The capital gains tax rates are determined based on the residential status of an individual / investor. Residential status can be either ‘Resident Indian’ or ‘Non-Resident India” (NRI).
Related article : Residential Status Check | Online calculator
2. Type of Funds & Mutual Funds Taxation
What are Equity-oriented Mutual Funds? – MF schemes that invest at least 65% of its fund corpus into equity and equity related instruments are known as equity mutual funds. Examples are : Large cap, ELSS tax saving funds, Mid-cap, Balanced funds (hybrid equity oriented), Sector funds etc.,
What are Non-Equity Mutual Funds? – MF schemes that hold less than 65% but more than 35% of their portfolio in equities and equity related instruments are known as Non-Equity Funds. Examples are : Hybrid funds
What are Specified Mutual Fund Schemes? – a mutual fund by whatever name called, where not more than 35% of its total proceeds is invested in the equity shares of domestic companies. Examples are : Liquid Funds, Short Duration Debt Funds etc.,
3. Period of Holding & Capital Gains on Mutual Funds
Capital gains on Mutual funds could be either long term capital gains or short term capital gains, depending on your investment horizon.
- Long Term Capital Gains
- If you make a gain / profit on your investment in a Equity Mutual Fund scheme that you have held for over 1 year, it will be classified as Long-Term Capital Gain.
- If you make a gain / profit on your investment in a Non-Equity Mutual Fund scheme (or in a Debt Fund) that you have held for over 3 years, it will be classified as Long Term Capital Gain.
- Short Term Capital Gains
- If your holding in a Equity mutual fund scheme is less than 1 year i.e. if you withdraw your mutual fund units before 1 year, after making a profit, then the profit will be considered as Short Term Capital Gain.
- If you make a gain / profit on your Non-Equity (or other than equity oriented schemes) that you have held for less than 36 months (3 years), it will be treated as Short Term Capital Gain.
Capital gains from transfer of units of “specified mutual fund schemes” acquired on or after 1st April 2023 are treated as short term capital gains taxable at applicable slab rates as provided above irrespective of the period of holding of such mutual fund units.
Mutual Funds Taxation Rules FY 2023-24 (AY 2024-25) | Capital Gains Tax Rates Chart
Let us now look into the applicable tax rates on capital gains of different types mutual fund schemes;
Capital Gain Taxation on Equity Mutual Funds for FY 2023-24 / AY 2024-25
Capital Gains Tax Rates on pure Equity oriented Mutual Fund Investments of a Resident Indian for FY 2023-24 are as below;
- The STCG (Short Term Capital Gains) tax rate on equity funds is 15%.
- The LTCG (Long Term Capital Gains) tax rate on equity funds is 10% on LTCG exceeding Rs 1 Lakh.
Capital Gain Taxation on Non-Equity Mutual Funds for FY 2023-24 / AY 2024-25
Capital Gains Tax Rates on Non-Equity oriented Mutual Fund Investments of a Resident Indian for FY 2023-24 are as below;
- The STCG tax rate on Non-Equity funds is as per the investor’s income tax slab rate.
- The LTCG tax rate on non-equity funds is 20% (with Indexation benefit)
The capital gains on Debt Funds (equity exposure of 0% to 65%, old classification) MF investments made prior to 01-Apr-2023, are taxed as above.
Capital Gain Taxation on Specified Mutual Funds for FY 2023-24 / AY 2024-25
Capital Gains Tax Rates on Specified Mutual Fund Schemes for a Resident Indian for FY 2023-24 are as below;
- The STCG tax rate on Debt funds or Specified Funds is as per the investor’s income tax slab rate.
- The LTCG tax rate on Specified funds is as per the investor’s income tax slab rate, treated as STCG only.
Taxation of Mutual Fund Dividends AY 2024-25
With effective from 1st April 2020, the dividend income received by investors from mutual funds (Equity or Debt funds) will be subject to TDS @ 10%. This TDS is applicable if such income is in excess of Rs 5,000 u/s 194K.
Also, such dividend income is a taxable income in the hands of investor as per his/her income tax slab rate.
NRI Mutual Fund Investments & TDS Rate FY 2023-24
Section 196A : Non-residents earning income from mutual funds in India can provide a Tax Residency Certificate from April 1st, 2023, to avail the benefit of TDS as per the rate given in the tax treaty, instead of the flat rate of 20%.
Below are the TDS rates applicable on Mutual Fund redemptions by NRIs for AY 2024-25.
I believe, you find ‘Mutual Funds Taxation Rules FY 2023-24’ post comprehensive and useful. In case, you have any questions on mutual fund capital gains and applicable tax rates, post them in the below comments sections or in our new FORUM platform.
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(Post first published on : 21-July-2023)