As the window for Income Tax Return (ITR) filing for Assessment Year (AY) 2025-26 opens, taxpayers are reminded that apart from reporting salary income, it is crucial to disclose any capital gains earned during the financial year. A common area of confusion revolves around how gains from mutual fund (MF) investments are taxed under the old versus new income tax regimes.
Capital Gains from Mutual Funds: No Difference Between Regimes
Taxation of capital gains from mutual funds remains consistent across both the old and new income tax regimes. According to Parizad Sirwalla, Partner and Head of Global Mobility Services, Tax, at KPMG in India, all deductions allowed in computing capital gains—including those for reinvestments into specified assets—are applicable regardless of which tax regime a taxpayer chooses.
This means that whether one opts for the new concessional tax regime or sticks to the traditional one with deductions, the treatment of capital gains from mutual funds remains unchanged.
Classification and Tax Rates for Mutual Fund Gains
For tax purposes, mutual funds are broadly categorized into three types:
- Equity Mutual Funds
- Non-Equity Mutual Funds
- Specified Mutual Funds (a special sub-category under non-equity MFs)
Equity Mutual Funds:
- Long-Term Capital Gains (LTCG): Gains from equity MFs held for more than 12 months are treated as long-term. From July 23, 2024, these gains are taxed at 12.5%, with an exemption for the first ₹1.25 lakh.
- Short-Term Capital Gains (STCG): Gains from equity MFs held for 12 months or less are taxed at a flat rate of 20%.
Non-Equity Mutual Funds:
- LTCG: Gains from units held for over 24 months are taxed at 12.5%.
- STCG: Gains from units held for 24 months or less are taxed according to the investor’s applicable income tax slab rate.
Specified Mutual Funds:
- These are treated differently, with all gains—regardless of the holding period—deemed as short-term and taxed as per slab rates.
Surcharge and Cess: What You Should Know
While the base tax rates apply uniformly, the surcharge and cess structure differs slightly between the two tax regimes. Under the old tax regime, surcharge rates can go up to 37% for incomes exceeding ₹5 crore. However, the new tax regime caps the surcharge at 25% for incomes above ₹2 crore. Importantly, for all LTCG and STCG arising from equity mutual funds, the surcharge is limited to 15%, regardless of the regime chosen.
Key Takeaway
Mutual fund investors filing ITR for FY 2024-25 must note that while their choice of tax regime influences overall tax liability and applicable surcharge rates, it does not alter how capital gains from mutual funds are calculated or taxed. Staying informed about the updated tax rates, holding period thresholds, and available deductions is essential for accurate tax filing and compliance.
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