New Tax Rules on Mutual Funds Kick In: What Changes From July 23 and How It Impacts Your Returns

From July 23, 2024, a new set of tax rules has come into force, changing how gains from mutual funds are taxed in the upcoming Assessment Year 2025–26. The revised norms affect equity, debt, gold, and international mutual funds, with higher long-term capital gains (LTCG) taxes and removal of indexation benefits for some categories. Financial planners say the timing of redemptions, the type of fund, and even the SIP start date can significantly affect your post-tax returns.

Why Timing of Redemption Matters

Col Sanjeev Govila (retd), CEO of Hum Fauji Initiatives, explains that delaying or advancing redemptions around July 23 can lead to a noticeable tax difference.

For instance:

• Equity Mutual Funds
  Scenario: Rohan invests ₹10 lakh in July 2021, and the value rises to ₹16 lakh.
  
  • Redeeming before July 23: LTCG tax is 10% after ₹1.25 lakh exemption = ₹47,500.
    
  • Redeeming after July 23: LTCG rate rises to 12.5%, tax = ₹59,375.
    
• Debt Mutual Funds (bought before April 1, 2023)
  Scenario: Priya’s investment of ₹10 lakh grows to ₹16 lakh.
  
  • Before July 23: Indexation reduces taxable gain to ₹3 lakh; 20% tax = ₹60,000.
    
  • After July 23: No indexation; full ₹6 lakh taxed at 12.5% = ₹75,000.
    

“The loss of indexation makes debt funds more expensive tax-wise and less appealing for long-term investors,” says Govila.

SIPs: Tax Depends on When You Started

Each SIP installment is treated as a separate investment, which means taxation varies by the purchase date:

• SIPs started before April 1, 2023: Debt fund units held over two years get LTCG treatment at 12.5%.
  
• SIPs after April 1, 2023: Gains taxed at the investor’s income slab rate, regardless of holding period.
  

This means that someone like Arun, who started a ₹5,000 monthly SIP in 2022, will benefit from lower taxes on older installments compared to newer ones.

Six Tax Categories for SIPs

Vivek Jalan, partner at Tax Connect Advisory Services LLP, outlines six distinct tax categories for mutual fund units to help investors navigate the new system:

1. Bought on or before March 31, 2023; sold before July 23, 2024; held <36 months
   
   • Treated as STCG; taxed at slab rate.
     
2. Bought on or before March 31, 2023; sold before July 23, 2024; held >36 months
   
   • LTCG at 20% with indexation.
     
3. Bought on or after April 1, 2023; sold before July 23, 2024
   
   • Taxed at slab rate.
     
4. Bought on or before March 31, 2023; sold after July 23, 2024; held <2 years
   
   • STCG at slab rate.
     
5. Bought on or before March 31, 2023; sold after July 23, 2024; held >2 years
   
   • LTCG at 12.5%, no indexation.
     
6. Bought on or after April 1, 2023; sold after July 23, 2024
   
   • Taxed at slab rate.
     

“Debt mutual funds sold after July 23, 2024, will no longer enjoy indexation benefits. This flat LTCG rate of 12.5% could prove costly for long-term investors,” Jalan cautions.

Gold and International Funds Also Affected

Chintak Shah, Vice President at Anand Rathi Wealth Ltd., points out that gold and international mutual funds—once attractive for long-term investors—have lost their indexation advantage too.

“These funds were earlier taxed at 20% with indexation if held for over three years. Now, they’re treated as long-term after two years, but taxed at 12.5% without indexation,” Shah explains.

Whether this change benefits investors depends on fund performance. “If the fund delivers more than 9.5% annual returns, the new regime could be better. Otherwise, the old structure was more tax-efficient,” he adds.

Bottom Line

The new tax rules significantly alter how mutual fund gains will be taxed starting July 23. Investors need to reassess their redemption timing, review SIPs, and consult tax professionals to avoid surprises in AY 2025–26.