Budget 2024 has introduced several tax reforms that will impact mutual fund investors, as outlined by Finance Minister Nirmala Sitharaman. Here’s a summary of the key changes and their implications for your investments:

1. Changes in Capital Gains Tax:

   • Increased LTCG Tax Rate: The long-term capital gains (LTCG) tax on financial and non-financial assets has been raised from 10% to 12.5%.
   • Higher STCG Tax: The short-term capital gains (STCG) tax rate on specific financial assets has been increased from 15% to 20%.
   • Removal of Indexation Benefit: The benefit of adjusting the purchase price of an asset for inflation, known as indexation, has been eliminated for all assets starting July 23, 2024. This change will impact the tax efficiency of long-term investments.
   • Increased LTCG Exemption Limit: The exemption limit for long-term capital gains has been raised to Rs 1.25 lakh per year from Rs 1 lakh.

2. Impact on Mutual Funds (MFs):

   • Clarified Tax Treatment: The tax treatment for various types of mutual funds, including hybrid funds, gold ETFs, and fund of funds (FoFs), has been clarified.
   • Hybrid Funds: Hybrid funds with at least 65% equity exposure can now benefit from LTCG tax rates if held for over 24 months. However, hybrid funds with 35-65% equity exposure will lose indexation benefits if held for more than three years.
   • Gold Investments: Gold mutual funds, gold ETFs, and other gold-related investments will now be subject to the LTCG tax regime.
   • Fund of Funds (FoFs): The tax treatment of FoFs has been clarified. FoFs will be categorized as equity or debt funds based on their investments. FoFs investing primarily in equity funds can avail LTCG benefits after holding for more than 24 months.

These changes reflect a shift in the tax landscape that mutual fund investors should carefully consider. Adjusting your investment strategy in light of these new rules can help manage your tax liabilities effectively.

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