Don't let tax rate hikes disrupt wealth creation via equity funds

International, gold and silver funds and ETFs will be taxed more favourably from next year

- SANJAY KUMAR SINGH

The Union Budget on July 23, 2024, ushered in radical changes in the taxation of mutual funds. Investors must understand their ramifications and modify their investment strategy wherever required.

Equity funds

Long-term capital gains (LTCG) tax on equity funds increased from 10 per cent to 12.5 per cent in the budget while short-term capital gains (STCG) tax increased from 15 to 20 per cent. "While the 33 per cent increase in STCG tax may seem high, it should not be a concern for investors as equity funds should always be held for the long term," says Vidya Bala, co-founder, PrimeInvestor.

Investors should also view the increase in the LTCG tax rate in conjunction with the increase in capital gains exemption from ₹1 lakh to ₹1.25 lakh, which will provide some relief.

Suppose that a person earns 12 per cent pre-tax return on an equity fund. Earlier, her post-tax return with 10 per cent LTCG tax would have been 10.8 per cent. Under the proposed tax rate of 12.5 per cent, her post-tax return will be 10.5 per cent. The differential in post-tax return at the end of the first year is 0.3 percentage points. "The post-tax return differential reduces over time. After 10 years, it decreases to 0.2 percentage points and after 20 years even further to 0.14 percentage points," says Bala.