The holding period for equity Fund of Funds (FoFs), overseas Fund of Funds (international funds), and gold mutual funds has recently been decreased from over 36 months to over 24 months
Capital gain tax: The Union Budget 2024-25, presented by Finance Minister Nirmala Sitharaman, has introduced significant modifications to the capital gains tax structure, presenting a mix of challenges and advantages for investors.
FM Sitharaman's announcement included adjustments in the holding period and Long-Term Capital Gains (LTCG) tax rate, with the Short-Term Capital Gains (STCG) tax rate remaining constant for overseas Fund of Funds (FoFs), including international funds, gold mutual funds, and equity FoFs.
Furthermore, she highlighted that moving forward, short-term capital gains derived from specific financial assets will be taxed at a rate of 20%, marking a 5% increase from the previous rate of 15%. It was explicitly mentioned that this revised tax rate will solely be applicable to the specified financial assets, whereas all other financial and non-financial assets will continue to be taxed at their respective existing rates.
The holding period for equity Fund of Funds (FoFs), overseas Fund of Funds (international funds), and gold mutual funds has recently been decreased from over 36 months to over 24 months, coinciding with a modification in the Long-Term Capital Gains (LTCG) tax rate to 12.5%, as opposed to the previous method of taxation based on the individual tax slab rate, with no adjustments to the Short-Term Capital Gains (STCG) tax rate. This update has notably enhanced the appeal of equity FoFs, overseas FoFs (international funds), and gold mutual funds to potential investors.
In the last full Budget in 2023, a categorisation was introduced for mutual fund schemes with an equity investment of less than 35%. The main aim was to exclude debt funds from receiving long-term capital gains (LTCG) and indexation benefits. However, other funds like international funds, gold funds, and gold exchange-traded funds (ETFs) were unexpectedly affected as they also fell under the definition of a 'specified mutual fund'.
In this Budget 2024, FM Sitharaman provided further clarification regarding the definition of 'specified mutual funds'. Henceforth, 'specified mutual funds' are identified as funds that allocate a minimum of 65% of their assets towards debt and money market instruments. Consequently, this revision has shifted the focus back onto other funds within the industry.
Nasser Salim, Managing Partner at Flexi Capital, told CNBC TV18 that a key impact of the modifications made in the Union Budget pertains to international ETFs. Under the updated regulations, international ETFs are now eligible for long-term capital gains treatment after a holding period of 12 months, whereas funds of funds (FOFs) will qualify after 24 months.
This adjustment is foreseen to draw significant investments via international channels, with a particular focus on international ETFs. As a result, heightened interest and capital inflows are projected towards international ETFs as opposed to FOFs.
“These changes collectively enhance the attractiveness of these investment categories by providing more favourable tax treatment and a shorter holding period for long-term benefits. Although the holding period for LTCG has been reduced from 36 months to 24 months, it is important to note that SEBI’s objective with these changes is to rationalize taxation rather than to promote short-term investments," said Sagar Shinde, VP Research, Fisdom.
He added: “Among all other products, gold and international FoFs should be considered by investors. Gold remains a strategic hedge against inflation and economic downturns, while international exposure, especially to the US markets, provides opportunities for growth due to favorable currency depreciation and economic recovery. These changes further incentivize investors to include these funds in their portfolios, optimizing both diversification and tax efficiency.”
