Capital Gains Tax Rules on Equity Shares and Mutual Funds Explained

 

Capital Gains Tax Rules on Equity Shares and Mutual Funds

The Union Budget 2024 has introduced major changes to the capital gains tax structure for equity shares and mutual funds, significantly impacting retail investors, traders, and portfolio managers alike. Whether you're a short-term speculator or a long-term investor, understanding the new rules for Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) is essential for maximizing returns and maintaining compliance during FY 2024-25.

Capital gains tax is levied on profits earned from the sale of capital assets like listed shares or mutual fund units. These are categorized into:

STCG: Sale within 12 months

LTCG: Sale after 12 months

Short-Term Capital Gains (STCG): What’s New?

Previously taxed at 15%, STCG on listed equity shares and equity mutual funds is now taxed at 20%, effective July 23, 2024.

STT (Securities Transaction Tax) must be paid.

STCG can be offset against both STCG and LTCG.

Unused STCG losses can be carried forward for 8 years (if ITR is filed on time).

Long-Term Capital Gains (LTCG): Latest Provisions

Earlier taxed at 10% above ₹1 lakh per annum, LTCG now sees a rate increase to 12.5% for gains exceeding ₹1.25 lakh after July 23, 2024.

Gains before that date are taxed at the old rate of 10%.

The grandfathering clause remains intact—gains till Jan 31, 2018, are exempt.

LTCG can be offset only against other LTCG, not STCG.

Losses can be carried forward for 8 years.

Equity Mutual Funds: Tax Treatment

Taxation for mutual funds follows the same rules as equities:

STCG (within 12 months): Now 20%

LTCG (after 12 months):

10% above ₹1 lakh before July 23, 2024

12.5% above ₹1.25 lakh after that

Debt mutual funds are taxed at slab rates for investments made after April 1, 2023, with no indexation benefit.

Virtual Digital Assets (Crypto)

A flat 30% tax on all gains, regardless of holding period. No deductions allowed.

Dividend Taxation

Dividends from mutual funds are taxed per the investor’s income slab. A 10% TDS applies if dividend income exceeds ₹5,000 annually.

Tax Planning Tips for FY 2024-25

Use LTCG Exemption: Book gains strategically under the ₹1.25 lakh limit.

Tax Loss Harvesting: Offset gains by selling underperforming investments.

Prefer Growth Options: Avoid frequent dividend taxes.

Use SWPs: Systematic withdrawals help reduce tax impact.

Filing Capital Gains Taxes

Use ITR-2 (for capital gains) or ITR-3 (for business income).

Declare gains under “Capital Gains” and dividends under “Income from Other Sources.”

Maintain records like broker statements, contract notes, and mutual fund summaries.

The revised capital gains tax regime for FY 2024-25 is more complex but aims to widen the tax net while offering modest relief to smaller investors. It’s crucial to reassess your portfolio, classify income correctly, and file your return on time. Consulting a tax professional can ensure compliance while optimizing your tax outgo in the new landscape.