Budget 2024: How Your Equity & Debt Investments are Taxed Now
The Union Budget 2024-25 brought some major changes in how capital gains are taxed. These changes especially impact how mutual funds are taxed, creating a bit of confusion, especially with hybrid funds. While we’re still waiting for official guidelines from the Income Tax department, we’ve gathered information from fund houses to help explain the new rules.
In this blog, we’ll break down how different types of investments are now taxed, focusing on equity, debt, hybrid, and other mutual funds, and what these changes mean for you.
Key Factors Affecting Your Investment Taxes:
- Listed or Unlisted: Whether your investment is listed (traded on exchanges) or unlisted will affect how it’s taxed. Stocks, bonds, REITs, InVITs, and ETFs are examples of listed securities. Listed investments held for 12 months or less are considered short-term, while those held for over 12 months are long-term. Unlisted investments follow a 24-month period.
- Type of Mutual Fund: The tax treatment varies depending on whether your mutual fund is equity-oriented, debt-oriented, or a hybrid fund (which includes a mix of equity and debt). For hybrid funds, taxation depends on the percentage allocated to equity or debt.
- Date of Purchase: If you invested in a debt fund before April 2023, different tax rules apply compared to those who invested after that date.
Types of Income You are Taxed On:
- Income from Dividends or Interest: There are no changes here. Dividends and interest income are added to your overall income and taxed according to your tax slab.
- Capital Gains: This refers to the profit you make when you sell your investments. Capital gains are either short-term or long-term, and the Budget introduced new holding periods and tax rates for both.
What's New with Tax Rates and Periods?
The Budget has simplified the holding periods for capital gains into two categories – 12 months and 24 months. The 36-month period is gone, and indexation (which adjusted your investment’s cost to account for inflation) has been removed. This change starts from July 23, 2024. If you sell before this date, the old rules still apply.
Taxation of Different Investment Types:
Stocks, Equity Mutual Funds, and Equity ETFs:
- Short-term: If held for less than 12 months, short-term capital gains tax has risen from 15% to 20%.
- Long-term: If held for more than 12 months, long-term capital gains are now taxed at 12.5% (up from 10%). The exemption limit has been raised from Rs 1 lakh to Rs 1.25 lakh.
Hybrid Funds with Over 65% Equity:
- This includes funds like aggressive hybrid funds and balanced advantage funds, where equity makes up at least 65% of the portfolio.
- Short-term (less than 12 months): Taxed at 20%.
- Long-term (over 12 months): Gains above Rs 1.25 lakh are taxed at 12.5%.
Debt Funds and Hybrid Funds with Over 65% Debt:
- Pure debt funds, like liquid funds, gilt funds, and debt ETFs, fall here, along with some hybrid funds.
- For investments made after April 1, 2023, capital gains are added to your income and taxed at your slab rate.
- For investments made before April 1, 2023, and held for more than 24 months, long-term gains are taxed at 12.5% without indexation. If sold before July 23, 2024, indexation will apply at 20%.
Hybrid Funds with 35-65% Equity:
These funds, like balanced hybrid funds, now follow the new rule where short-term holding is less than 24 months. Short-term gains are taxed at your slab rate, while long-term gains (held over 24 months) are taxed at 12.5% without indexation.
Fund-of-Funds, International Funds, and Gold Funds:
These funds had a tax change in April 2023, where all capital gains for investments made after that date were taxed at your slab rate. However, starting April 2025, these funds will be taxed differently depending on their portfolio allocation. For this fiscal year, they remain taxed like debt funds.
Listed vs. Unlisted Bonds, Gold ETFs, and International ETFs:
- Listed securities(like stocks, REITs, and ETFs): Short-term capital gains are taxed at 20%, while long-term capital gains (held for more than 12 months) are taxed at 12.5%.
- Unlisted securities(like property or physical gold): Short-term gains (less than 24 months) are taxed at your slab rate, while long-term gains are taxed at 12.5%.
Key Takeaways:
- The capital gains tax rates have increased across the board, especially for equity and hybrid funds.
- The exemption limit for long-term capital gains on stocks and equity funds has increased to Rs 1.25 lakh.
- Indexation is no longer available for long-term capital gains from debt funds or hybrid funds held for more than 24 months.
- Different types of funds and ETFs may see varying tax treatments depending on their underlying asset allocation and holding period.
While these changes may seem complex, it’s important to stay informed and plan your investments carefully, especially if you are holding mutual funds or ETFs. Always consult with a financial advisor for personalized advice.
