How Budget 2024 Impacts SIP Investments through Tax Changes.
The Union Budget 2024-25 increased taxes on short-term capital gains (STCG) and long-term capital gains (LTCG) for equity-oriented funds. The hike in taxes will have a significant impact on investors. A Systematic Investment Plan (SIP) of Rs 50,000 for 60 months in equity funds will now result in a capital gains tax outgo of Rs 94,095, up from the previous Rs 77,456.
The budget, announced on July 23, raises the STCG tax on equity mutual funds to 20% from the previous 15%, while the LTCG tax has increased to 12.5% from 10%. However, there is some relief as the exemption limit for LTCG tax has been raised from Rs 1 lakh to Rs 1.25 lakh per financial year.
Equity mutual funds remain a popular choice for Indian investors seeking exposure to the stock market, with monthly SIP investments surpassing Rs 20,000 crore for the first time in April 2024.
Taxation of Mutual Funds
Each SIP instalment is treated as a separate investment for tax purposes. For instance, if you invest Rs 10,000 monthly in an equity mutual fund via SIPs, each instalment is considered individually to determine the holding period and applicable tax rate. Mutual fund investments follow the First-In-First-Out (FIFO) method for tax treatment when units are redeemed.
Taxation of Equity Funds
The LTCG tax hike from 10% to 12.5% means long-term investors will pay slightly higher taxes. However, the increased exemption limit to Rs 1.25 lakh offers some relief to small investors. The STCG tax increase from 15% to 20% will impact short-term equity investors more significantly.
According to Moneycontrol report, Feroze Azeez, Deputy CEO of Anand Rathi Wealth, states, “Although the tax rates are marginally increased, equity mutual funds remain an attractive investment opportunity compared to other asset classes. Therefore, we do not anticipate that the change in tax rates will significantly affect the flows towards equity mutual funds.”
Example: Tax on SIP of Rs 50,000 per month upon Redemption
Status Quo on Debt Funds
While the Budget has reduced capital gains tax rates on gold funds, gold ETFs, overseas funds, and funds of funds (FoFs), debt mutual funds will continue to be taxed at the normal income tax rate. Mutual funds investing more than 65% of their proceeds in debt and money market instruments fall under Section 50AA, excluding ETFs, Gold Mutual Funds, and Gold ETFs from this categorization.
According to the Moneycontrol report, Rajarshi Dasgupta, Executive Director at AQUILAW, notes, “The widening gap between STCG and LTCG rates is a clear incentive for longer-term holdings, which aligns with our view of creating sustainable wealth. This move is also a step towards standardising taxation across various asset classes, potentially simplifying the investment decision-making process for many.”
These changes underscore the government’s effort to promote longer-term investments and simplify the tax landscape across different asset classes.
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