Budget 2024: Impact on Mutual Fund Investors – Higher Taxes, Strategic Shifts
Budget 2024: Impact on Mutual Fund Investors - Higher Taxes, Strategic Shifts
In a sweeping move that has stirred the financial landscape, the Union Budget 2024 has announced revisions to the taxation of capital gains on equity-oriented mutual funds, eliciting mixed reactions from investors across the country.
Effective immediately, the government has raised the Short Term Capital Gains (STCG) tax on equity mutual funds from 15% to 20%. This adjustment is poised to affect investors who hold their funds for less than three years, amplifying their tax outgo on gains accrued within this period. For instance, a monthly investment of Rs 50,000 over 60 months in equity funds under a Systematic Investment Plan (SIP) would now incur a higher STCG tax of Rs 94,095, compared to the earlier Rs 77,456.
Moreover, Long Term Capital Gains (LTCG) tax on equity funds has also seen an increase, climbing from 10% to 12.5%. Despite this uptick, the government has concurrently raised the exemption limit for LTCG tax to Rs 1.25 lakh per annum from the previous Rs 1 lakh. This adjustment is designed to provide some relief particularly to small investors, allowing them to shield a larger portion of their gains from taxation.
Mutual funds have long been a favored avenue for Indian investors seeking exposure to equity markets, with monthly SIP investments consistently surpassing the Rs 20,000-crore mark since April 2024. The government’s latest tax policy adjustments aim to recalibrate the fiscal landscape in line with broader economic objectives.
Addressing the changes, financial experts suggest that while the marginally increased tax rates may pose challenges for short-term investors, equity mutual funds remain attractive relative to other asset classes. Feroze Azeez, Deputy CEO at Anand Rathi Wealth, emphasized that despite the revised tax rates, the fundamental appeal of equity mutual funds is unlikely to diminish significantly.
Meanwhile, the Budget has maintained the status quo for debt mutual funds, which will continue to be taxed at normal income tax rates. The differentiation in tax treatment aims to align with the government’s strategy of standardizing taxation across various asset classes.
Rajarshi Dasgupta, Executive Director at AQUILAW, highlighted the widening gap between STCG and LTCG rates as a strategic incentive for longer-term investment horizons. This move is expected to encourage sustainable wealth creation practices among investors, thereby fostering stability and growth in the mutual fund sector.
