Under the old system, the tax treatment of capital gains on mutual funds was determined by the duration of the investment - either long-term or short-term. 
Special 
Under the old system, the tax treatment of capital gains on mutual funds was determined by the duration of the investment - either long-term or short-term. Union Budget taxation: Specified Mutual Fund refers to a type of mutual fund, regardless of its designation, that has a predetermined maturity date. In this fund, a maximum of 35% of the total capital is invested either directly or indirectly in the equity shares of companies within the domestic market.
For the Specified mutual fund schemes, the Budget 2024 modified the taxation terms. In the Budget 2024 announcement, Finance Minister Nirmala Sitharaman offered additional insights into the categorisation of 'specified mutual funds'. Going forward, 'specified mutual funds' will be categorized as funds that invest at least 65% of their assets in debt and money market instruments. As a result of this update, the spotlight has now turned to other funds in the sector.
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Under the old system, the tax treatment of capital gains on mutual funds was determined by the duration of the investment - either long-term or short-term. However, the Finance Bill 2024 has proposed significant changes to this taxation scheme. Specifically, the Bill aims to eliminate the long-term capital gains tax benefit for mutual funds under the new regulations.
As a result of this change, any gains from these mutual funds will now be treated as short-term capital gains for tax purposes. These gains will be subject to the investor's applicable slab rates, irrespective of the holding period. This adjustment is a part of the government's broader efforts to create tax parity among different asset classes, particularly between debt-focused and equity-focused mutual funds.
The Finance Bill 2024 stated Specified income – Total income excluding income by way of dividend on shares and short-term capital gains on units of equity oriented mutual fund schemes and long-term capital gains on mutual fund schemes. Further, Health and Education Cess to be levied at the rate of 4% on aggregate of base tax and surcharge.
"Specified mutual fund schemes are defined under the Finance Bill 2024 as mutual fund schemes in which the equity component makes up less than 35% of the total investment. These funds have less exposure to the stock markets or are predominantly focused on debt. The Finance Bill 2024 modifies how Specified Mutual Funds are treated tax-wise. Previously, the long-term or short-term holding period determined how these funds' capital gains were taxed. The Finance Bill 2024, however, aims to do away with these mutual funds' long-term capital gains tax benefit under the new rules," said Thomas Stephen, Associate Director, Anand Rathi Shares and Stock Brokers.
He added: "This implies that gains from these mutual funds will now be taxed as short-term capital gains, subject to the investor's relevant slab rates, regardless of the holding duration. This adjustment is in line with the government's goal of achieving tax parity across various asset classes, especially between mutual funds that are focused on debt and those that are focused on equity. The post-tax returns from these funds may be impacted by the new tax law, therefore investors in these funds need to reevaluate their holdings."
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