The Union Budget has lowered capital gains tax rate on gold funds or gold exchange-traded funds (ETFs), overseas funds and Funds of Funds (FoFs). With the change in the Finance Bill, the long-term capital gains from these funds would be taxed at the rate of 12.5 percent after holding for two years.
However, the indexation benefit available for the LTCG calculation has been removed.
As of now, international mutual funds, gold funds/ETFs and FoFs are taxed like domestic debt or fixed-income funds. Investments for less than a three-year period are classified as short-term while those beyond that are termed as long-term. Short-term capital gains on these investments are taxed as per your applicable income tax slab. Meanwhile, long-term capital gains attract a tax rate of 20 percent after providing the indexation benefit.
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"While the capital gains tax on equity shares and equity-oriented mutual funds has increased, investors will find relief in the reduced tax rates on other financial assets such as fund of funds, gold/silver ETFs, and international funds. The simplification comes with the removal of indexation benefits, making the tax computation more straightforward. These changes are poised to impact investment strategies and portfolio allocations, encouraging diversification into a broader range of financial instruments,” said Arihant Bardia, CIO and Founder, Valtrust
With the changes to the Financial Bill 2024, the government has proposed that mutual funds investing more than 65 percent of total proceeds in debt and money market instruments will be covered under Section 50AA.
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Therefore, gold ETFs, gold mutual funds, FoFs and overseas funds will not be considered specified mutual funds.
According to Budget documents, “Specified Mutual Fund” means a mutual fund, which invests more than 65 percent of its total proceeds in debt and money market instruments.
On the impact of the Union Budget on gold, Chirag Mehata, CIO, Quantum AMC, said, “An important announcement for gold ETF / fund investors is the potential reduction in the long term tax incidence which changes from being at investors tax slabs to 12.5 percent after holding period of two years. This is a significant advantage from a tax perspective even as compared to physical gold and should stand at an advantage for investors in addition to other benefits that Gold ETFs provide.”
The Union Budget for 2024-25 has hiked the long-term capital gains tax (LTCG) on all financial and non-financial to 12.5 percent from 10 percent, while short-term capital gains tax (STCG) on some assets would be 20 percent.
Further, the exemption limit for long-term capital gains tax has been increased to Rs 1.25 lakh from Rs 1 lakh. The budget also announced that listed financial assets held for more than a year will be classified as long-term.
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"Short-term gains on certain financial assets shall henceforth attract a tax rate of 20 percent, while that on all other financial assets and all non-financial assets shall continue to attract the applicable tax rate," Finance Minister Nirmala Sitharaman said during her Budget speech on July 23.
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