Tax Query: How taxes are computed on new fund offers (NFOs)? Is there are change introduced in Union Budget 2024?

I am 45 and I have invested in 5 new fund offers in July and August. How are NFOs taxed? Is there are changes introduced in Union Budget 2024?

Name withheld on request

How much tax do I have to pay? Calculate now

Reply by CA (Dr.) Suresh Surana

The taxation of NFOs, like other mutual funds, primarily depends on the type of fund (equity or debt) and the holding period.

Taxation of Equity Mutual funds

Equity mutual funds are those funds that generally have at least 65% of equity allocation in their investment portfolios. The sale of units would be categorised into long-term and short-term gains depending upon the period of holding of such units. The period of holding of such units would be from the date of acquisition to the sale date. If the units of listed equity mutual funds are held for more than 12 months before the sale, the gains derived would be long-term capital gains in nature otherwise, short term capital gains.

The short-term capital gains would be taxed at the rate of 15% (enhanced to 20% w.e.f. 23rd July 2024) u/s 111A of the Income Tax Act (‘IT Act’). The long-term capital gains are taxed at 10% (enhanced to 12.5% w.e.f. 23rd July 2024) u/s 112A of the IT Act provided such long-term capital gains exceed the threshold limit of Rs. 1.25 lakh in a financial year (previously Rs. 1 lakh prior to Finance (No. 2) Act 2024).

Taxation of Debt mutual funds

Similar to the taxation of Equity Mutual funds, the taxation of Debt mutual funds also depends upon whether the units are long-term or short-term based on their period of holding. However, in this case, the gains are categorized as short-term, if the units are sold within 36 months (24 months to be considered if sold on or after 23rd July 2024), otherwise would be categorized as long-term.

Short term capital gains would be taxed at the applicable marginal slab rate of the investor whereas Long term capital gains of debt fund are taxed at 20% with indexation (12.5% without indexation w.e.f. 23rd July 2024) u/s 112 of the Act.

In case of any specified mutual funds* (where not more than 35% of its total proceeds is invested in equity shares of domestic companies) acquired on or after 1st April 2023, the gains derived from the said mutual funds would be deemed to be short term capital gains u/s 50AA of the IT Act and accordingly subject to tax as per the applicable marginal slab rates applicable to the investor/ taxpayer.

*Note: W.e.f. 1st April 2025, “Specified Mutual Fund” shall mean a mutual fund:

(a) a Mutual Fund by whatever name called, which invests more than 65% of its total proceeds in debt and money market instruments; or

(b) a fund which invests 65% or more of its total proceeds in units of a fund referred to in sub-clause (a)

The requirement of investment of not more than 35% in equity shares had impacted other funds which are not debt-oriented funds but invest below 35% in equity shares. Such funds include Exchange Traded Funds (ETFs), Gold Mutual Funds, Gold ETFs, Foreign Funds and Fund-of-Funds (FoFs). 

In order to bring clarity on the applicability of section 50AA of the Act,  the Finance Act 2024 amended the definition of section 50AA to clarify that the provisions of section 50AA of the Act shall not be applicable to these specified funds unless the investment criteria as per the amended definition has been met.

Accordingly, such aforementioned mutual funds sold on or after 1st April 2025 would be taxed in a manner similar to debt mutual funds.