As Capital Gains Tax Rates Change, Here's How Much Income Tax You Will Pay Now on Rs 5 Lakh Mutual Fund Earnings

The Union Budget 2024 has introduced significant changes to capital gains tax rates that will impact mutual fund investors. During her budget speech on July 23, 2024, Finance Minister Nirmala Sitharaman announced an increase in both long-term and short-term capital gains taxes. The long-term capital gains tax (LTCG) has been raised from 10% to 12.50%, while the short-term capital gains tax (STCG) has been increased from 15% to 20%.

However, there is a bit of good news for mutual fund investors with a holding period of more than a year. The exemption limit for LTCG has been increased from Rs 1 lakh to Rs 1.25 lakh. This means that gains up to Rs 1.25 lakh will not be taxed, providing some relief to long-term investors.

Impact on Rs 5 Lakh Mutual Fund Earnings

Let’s break down how these changes will affect your mutual fund earnings:

Long-Term Capital Gains (LTCG)

For mutual funds held for more than one year, the long-term capital gains tax will now be 12.50%. Previously, the LTCG tax was 10%. With the increased exemption limit, here's how the tax calculation changes for earnings of Rs 5 lakh:

  • Old Tax Regime (10% LTCG)

    • Exemption: Rs 1 lakh
    • Taxable Amount: Rs 4 lakh
    • Tax Payable: 10% of Rs 4 lakh = Rs 40,000

  • New Tax Regime (12.50% LTCG)

    • Exemption: Rs 1.25 lakh
    • Taxable Amount: Rs 3.75 lakh
    • Tax Payable: 12.50% of Rs 3.75 lakh = Rs 46,875

Short-Term Capital Gains (STCG)

For mutual funds held for one year or less, the short-term capital gains tax will now be 20%. Previously, the STCG tax was 15%. Here’s the tax calculation for short-term earnings of Rs 5 lakh:

  • Old Tax Regime (15% STCG)

    • Taxable Amount: Rs 5 lakh
    • Tax Payable: 15% of Rs 5 lakh = Rs 75,000

  • New Tax Regime (20% STCG)

    • Taxable Amount: Rs 5 lakh
    • Tax Payable: 20% of Rs 5 lakh = Rs 1 lakh

Understanding the Changes

  • Long-Term Investors: If you typically hold mutual funds for over a year, the increase in the exemption limit to Rs 1.25 lakh offers some relief, although you will still see a higher tax rate of 12.50%.
  • Short-Term Investors: Those who frequently trade mutual funds within a year will face a more substantial tax increase, as the STCG rate has risen to 20%.

Planning Ahead

Investors should consider these tax changes when planning their investment strategies. Long-term holding remains advantageous due to the higher exemption limit, but it's essential to factor in the increased tax rates in your financial planning.

Conclusion

The Union Budget 2024 has brought about notable changes in the capital gains tax structure. Investors need to stay informed and adapt their investment strategies to navigate these new tax rates effectively. By understanding the implications of these changes, you can make more informed decisions and optimize your mutual fund earnings.