Budget 2024 brings relief for gold ETFs, equity FoFs and international arrangements

The change will likely take effect for repayments after April 1, 2026.

According to MF officials, these offerings were inadvertently classified as debt funds last year, and this Budget marks a change in course.

In 2023, the government had said that any MF scheme investing less than 35 per cent of its corpus in domestic equities will no longer enjoy indexation benefits. The tax on such schemes was made at par with bank deposits, which is the individual slab rate. The tax change was primarily targeted at debt MF schemes; however, all MF schemes with less than 35 per cent exposure to domestic equities eventually lost the tax benefits.

In the 2024 Budget, the definition of debt funds has been changed again to ‘schemes that invest more than 65 per cent of their total income in debt and money market instruments’.

“However, the definition of specified MFs has been amended and will now apply only to MFs investing more than 65 per cent of their total income in debt and money market instruments. This will benefit mutual funds investing in gold, offshore securities or funds of funds as well as offshore mutual funds where redemption proceeds will now not be considered as short-term capital gains,” Rajesh Gandhi, Partner, Deloitte India, noted.

Industry body Association of Mutual Funds in India (Amfi) had called for such changes in its budget proposals.

“We are pleased to learn that Amfi’s request for a change in the definition of ‘Specified Investment Funds’ under Section 50AA has been acceded to and will lead to rationalisation of taxation for the funds affected hitherto,” the sector said in a statement on the Budget.

Moreover, the removal of indexation benefits across asset classes will also impact some of the recently launched hybrid funds, particularly in the multi-asset category. These new schemes, which invest 35-64 per cent of the corpus in domestic equities, will now be eligible for a long-term capital gains tax of 12.5 per cent if held for more than two years. If the holding period is less, the gains will be taxed at the investor’s income tax rate.

Until now, they were taxed at 20 percent after indexation if held for more than three years. According to experts, the minimum holding period for LTCG tax has now been reduced, but tax expenditures could be slightly higher under the new structure.

The tax burden will also increase in case of equity-oriented schemes as the government has increased the long-term capital gains tax from 10 percent to 12.5 percent. Debt MF offerings will continue to be taxed at the investor’s rate irrespective of the holding period.

First print: Jul 23, 2024 | 6:21 PM IST