Budget 2024 Revises LTCG for Mutual Funds – What It Means For Investors?

Following yesterday’s announcement, LTCG tax on equity mutual funds has been hiked from the previous 10% to 12.5%. At the same time, the exemption limit on certain financial assets has been increased from ₹1 lakh to ₹1.25 lakh per year.

Revised holding period – Listed & Unlisted assets

To further simplify the taxation treatment of capital gains, the Budget 2024 also revised the holding periods used to classify whether the listed and unlisted financial assets are long term or short term assets.

Financial assets listed on the recognised stock exchanges in India, such as listed stocks and bonds, Equity ETFs, Gold ETFs, Bond ETFs, Real estate investment trusts (REITs) and Infrastructure investment trusts (InvITs), and held for more than a year will be classified as long term.

On the other hand, unlisted financial assets and all non-financial assets must be held for 24 months or two years for the gains to qualify as long term gains. These include real estate, debt mutual funds, gold, gold mutual funds, unlisted shares (including shares listed abroad), foreign equity units, and debt mutual fund units acquired on or before March 31, 2023.

How Does the New LTCG Tax Affect You?

Like countess others, you too may have invested in mutual funds. However, with revised taxation of equity funds, your long term gains will not be taxed at 12.5% instead of the earlier 10%. On the other hand, long-term gains up to Rs.1.25 lakh re now exempt from tax, as opposed to Rs.1 lakh earlier. So, how do these two changes affect your investment’s bottom line? Let’s understand this with an example.

Let’s assume you have invested Rs.20 lakh in equity funds in 2020. By 2024, your funds are collectively valued at Rs.35 lakh. Let’s look at the difference in the LTCG tax you are liable to pay prior and post the Union Budget 2024 announcement.

Formula to calculate LTCG tax

Gains (minus) exemption amount * rate of tax

Here, gains are calculated by deducting the redemption amount deducted by investment amount.
From the above example, this would be Rs.35 lakh (minus) Rs.20 lakh = Rs.15 lakh

Case 1 (LTCG @10%; Exemption – Rs.1 lakh)
(Gains – Rs.1 lakh)*10%.
Rs.15,00,000 – Rs.1,00,000)*10% = Rs.14,00,000*10% = Rs.1,40,000

Case 2 (LTCG @ 12.5%; Exemption – Rs.1.25 lakh)
(Gains – Rs.1.25 lakh)*12.5%

(Rs.15,00,000 – 1,25,000)*12.5% = 13,75,000*12.5% = Rs.1,71,875

The difference in tax liability at 10% LTCG tax versus 12.5% LTCG tax is Rs.31,875. Thus, your tax liability for the same gain of Rs.15 lakh will go up by 22.8%.

The Final Word

The exemption of Rs.1.25 lakh under the new rule will only be beneficial if your gains are below Rs.2.25 lakh. In this case, the increased exemption of Rs.25,000 cancels out the hike in tax. So, if your gains are Rs.2 lakh, your tax at the previous rate would be Rs.10,000, but would reduce marginally to Rs.9,375 under the new rule, saving you Rs.625.

LTCG is applicable on long-term gains, which, for most people are investments to achieve life goals such as children’s education or retirement. Investment corpuses for these can often run in crores, especially in case of retirement. So, if you have a corpus of Rs.1 crore for retirement, you would be losing Rs.12.34 lakh from that in tax. This can significantly impact your retirement savings, requiring you to strategies to cover the loss of funds.

–The writer is the CEO of BankBazzar.com