India has introduced significant changes to the taxation of mutual funds, altering capital gains rules from July 2024. The new framework affects both equity and debt schemes, reshaping investor strategies and prompting concerns over compliance with complex filing requirements.
Key Changes in Mutual Fund Taxation
Equity-Oriented Funds
For equity mutual funds holding at least 65 percent in stocks, short-term capital gains (STCG) realised within 12 months are now taxed at 20 percent for redemptions made on or after 23 July 2024. Previously, the rate was 15 percent, according to the Central Board of Direct Taxes (CBDT).
Long-term capital gains (LTCG) exceeding ₹1.25 lakh per financial year are taxed at 12.5 percent without indexation benefits. The exemption limit was raised from ₹1 lakh to ₹1.25 lakh, providing partial relief to long-term investors.
Debt Mutual Funds
For investments made on or after 1 April 2023, gains from debt funds are fully taxed as per individual income tax slabs, with no indexation benefit.
For investments made before 31 March 2023, the rules depend on redemption dates:
- Redeemed before 22 July 2024: holdings over 36 months qualified for 20 percent LTCG with indexation.
- Redeemed on or after 23 July 2024: holdings over two years attract 12.5 percent LTCG tax without indexation.
Experts say this transition has eroded the attractiveness of debt schemes for tax-sensitive investors.
Hybrid, International, and Gold Funds
Hybrid funds with more than 65 percent equity exposure will be treated as equity funds, while those with lower equity allocation fall under debt-like taxation. Gold, international funds, and fund-of-funds are classified as “specified mutual funds” under the revised definition, with LTCG taxation only after a two-year holding period.
“Policy makers are clearly encouraging equity-linked investments, while reducing the tax arbitrage previously available in debt and hybrid schemes,” said Radhika Gupta, CEO of Edelweiss Mutual Fund, in an interview with The Economic Times.
Implications for Non-Resident Indians
Non-resident Indians (NRIs) face the same STCG and LTCG rates as residents. Dividends from mutual funds attract a 20 percent tax deducted at source (TDS). However, investors may claim exemptions under Double Taxation Avoidance Agreements (DTAAs), depending on their country of residence.
“NRIs must be especially careful in coordinating their tax filings across jurisdictions to avoid penalties,” said Sandeep Shah, partner at Nangia Andersen LLP, a tax advisory firm.
Compliance and Filing Challenges
Tax professionals have warned that changes implemented mid-financial year complicate reporting. Investors will need to split capital gains between pre- and post-July 2024 periods when filing returns for FY 2024–25.
The Times of India reported widespread mismatches in the government’s Annual Information Statement (AIS), with some taxpayers receiving incorrect purchase values or duplicate entries. The CBDT has urged taxpayers to verify data and submit corrections on the income tax portal.
Expert Outlook
Analysts suggest long-term investors should focus on equity-linked funds to maximise exemptions, while being mindful of new thresholds. Short-term investors in debt or hybrid funds may face higher tax outflows, reducing post-tax returns.
“While the new rules simplify some aspects of taxation, they also narrow the gap between different fund categories, making product choice more about financial goals than tax arbitrage,” said Ankur Gupta, partner at EY India.
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Conclusion
The reforms mark a turning point in India’s capital gains framework for mutual funds. For retail investors, the message is clear: holding period, asset mix, and redemption timing now play a more decisive role in net returns. Careful planning and early compliance will be essential to avoid unexpected tax liabilities.
