Key tax reforms
Reduced holding period:The holding period of equity investment funds, international fundsand gold mutual funds have been shortened from over 36 months to over 24 months to qualify for LTCG benefits.
Revised LTCG tax rate:The LTCG tax rate for these funds has been reduced to 12.5% for investments held for more than 24 months. Previously, investments held for more than 36 months were taxed at 20%. The STCG tax rate remains linked to the investor’s income tax bracket.
Impact on investors
Budget adjustments to the tax structure have significantly improved the attractiveness of international and gold mutual funds. The lower tax rate on LTCGs and the reduced holding period mean that investors can achieve favourable tax treatment earlier and at a lower tax rate. This makes these funds more accessible and potentially lucrative for long-term investors.
Pre-budget scenario vs. post-budget scenario
Before Budget 2024:International funds and gold mutual funds were taxed as STCG at the investor’s fixed interest rate if held for less than three years. Investments held for more than three years were taxed as LTCG at the rate of 20%.
After the 2024 budget:The LTCG tax rate has been reduced to 12.5%, applicable to investments held for more than 24 months. Investments held for less than 24 months continue to be taxed as STCG, in line with the investor’s tier rate.Advantages of International and Gold Funds:
International and gold funds offer investors diversification by spreading investments across different asset classes and geographies. This diversification helps manage risk, especially in volatile market conditions. Gold mutual funds serve as a strategic hedge against inflation and economic crises. Gold’s intrinsic value often provides stability during periods of economic uncertainty.
International funds, particularly those investing in U.S. markets, offer exposure to global economic growth and currency movements, which can provide opportunities for significant returns, especially during periods of favorable currency depreciation and economic recovery.
International funds:Over the past year, international funds have returned an average of 12.53%. The Mirae Asset NYSE FANG+ FoF ETF recorded the highest return of 51.83%. In contrast, the Mirae Asset Global Electric & Autonomous Vehicles FoF ETF suffered a loss of approximately 16.93%.
(Cumulative returns as of July 25, 2024)
Source: ACE MF
Gold Funds:Gold funds have performed well, with an average return of 14.54% over the past year. The UTI Gold ETF FoF led the category with a return of 18.73%, while the Snow flower The FoF gold and silver ETF offered the lowest return, around 10.96%.
Accumulated returns as of July 26, 2024)
Source: ACE MF
In view of the favourable developments, investors are advised to consider using systematic investment plans (SIPs) and systematic transfer plans (STPs) when investing in these funds. Despite the positive outlook, market volatility may persist, hence a minimum investment horizon of five years is recommended. This approach helps mitigate risks and offers the possibility of significant gains over the long term.
Final Thought
The 2024 Budget reforms have made international funds, gold funds and equity mutual funds more attractive by offering better tax benefits and a shorter holding period for LTCGs. These changes present an opportunity for investors to diversify their portfolios and optimise returns. However, as always, it is critical to align investment options with individual risk tolerance, investment horizon and financial goals.
(The author of the article is Chakravarthy V., Co-Founder & CEO of Prime Wealth Finserv)
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