At the heart of this transformation lies the “Mutual Funds Sahi Hain” campaign, which not only democratized mutual fund investing but also played a pivotal role in advancing financial inclusion.
Key Investment Trends
-Investor Base: Over 22 crore Indians
-Folios: Grew from 4 crore (10 years ago) to 8.7 crore (5 years ago)
– AUM: Increased from ₹8.26 trillion in 2013 to ₹66.93 trillion in 2024
These numbers reflect the deep trust and optimism Indian investors place in mutual funds as a vehicle for long-term wealth creation.
Yet behind these impressive statistics lies a labyrinth of taxation rules that have evolved significantly over the years. For many investors—especially those managing portfolios with a mix of asset classes—deciphering tax liabilities can feel like navigating a mathematical maze.
The changes in taxation norms have not only introduced new rates and provisions but have also redefined how gains from mutual funds are taxed, prompting a reassessment of investment strategies.
Evolution of Taxation: A Dual Narrative
Mutual funds in India generally fall into two broad categories: equity mutual funds and debt/specified mutual funds. Each category is governed by its own set of tax rules, which have undergone substantial revisions in recent years.
Equity Mutual Funds – A Case in Point
By definition, equity mutual funds invest at least 65% of their portfolio in equity instruments. For nearly two decades—from 1998 to 2018—the tax framework for these funds remained relatively stable.
Initially, investors enjoyed a major benefit: Long-Term Capital Gains (LTCG) were exempt from tax if the investment was held for more than one year. In contrast, Short-Term Capital Gains (STCG) were taxed at a higher rate.
However, the Union Budgets of 2018 and 2024 brought significant changes:
–1998: LTCG exempt if held for over 1 year; STCG taxed at a higher rate
–2018: LTCG exemption removed. Gains accrued until January 31, 2018, were “grandfathered” (i.e., not taxed), but future gains became subject to a 10% tax
–2024: LTCG tax increased to 12.5%, and STCG tax raised to 20%
These changes have considerable implications. For instance, an investor who has held an equity fund for several years may find that while earlier gains (before 2018) remain untaxed, all subsequent appreciation is now taxed at a higher rate. This bifurcation demands diligent record-keeping and a strategic approach to gain harvesting and tax planning.
Timeline of Tax Changes for Equity Mutual Funds
-Pre-2018: LTCG exempt (if held 1+ year); STCG taxed at a higher rate
-Post-2018: New LTCG taxed at 10% (with grandfathering); STCG at 15%
-2024 Update: LTCG increased to 12.5%; STCG increased to 20%
Debt and Specified Mutual Funds
Debt mutual funds, which invest more than 65% in debt securities, and specified mutual funds (those investing 35–65% in equity instruments), have also seen major tax reforms.
Traditionally, these funds offered the benefit of indexation—a mechanism that adjusts the purchase price for inflation, thereby reducing taxable gains. However, recent fiscal changes have reconfigured how and when this benefit is applied, making tax computation more nuanced.
For example, an investor who held a debt fund for over three years once enjoyed significant relief through indexation. Today, however, with the evolving rules, tax liability depends on both the holding period and the specific provisions applicable to each fund category.
Key Considerations for Debt/Specified Mutual Funds
-Indexation Benefit: Once a key advantage for long-term holders
-Tax Computation: Now more complex due to rule changes
-Holding Period: Critical in determining tax treatment
The Curious Case of Mutual Fund Taxation
The evolving mutual fund taxation regime mirrors the broader challenges faced by investors in a rapidly transforming financial landscape. While mutual funds continue to serve as a robust vehicle for wealth creation, the ever-changing tax environment demands a more informed and strategic approach.
By understanding the historical context, keeping up with regulatory updates, and leveraging expert advice, investors can navigate this complex terrain with greater confidence—ensuring their long-term financial goals aren’t undermined by unexpected tax liabilities.
(The author Shobhit Mathur is Co-founder, Ionic Wealth by Angel One. Views are own)
