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Budget 2024: How Indexation Changes Bring Relief For Gold ETFs, FoFs, International Funds
The Union Budget 2024 has introduced changes to how capital gains on gold are taxed. Gold and silver exchange-traded funds (ETFs), equity and hybrid fund of funds (FoFs) and international schemes will again qualify for long-term capital gains (LTCG) tax benefits.
The holding period for investing in gold as long term capital gains has been brought down from 36 months to 24 months. Further, the benefit of indexation for LTCG calculation on gold has been removed.
What Did The Budget Say About Indexation?
According to Budget documents, mutual fund (MF) offerings, other than those that are equity or debt-oriented, will now qualify for long-term capital gains taxation of 12.5 per cent if held for over 24 months. At present, gold and silver ETFs and index funds, equity-oriented or hybrid fund of funds (FoFs) and international schemes are taxed at the investors’ income tax slab rate.
The change is likely to become effective on redemptions post April 1, 2026. According to MF officials, these offerings had unintentionally got classified as debt funds last year and this budget makes a course correction.
What Does This Mean?
Investors in mutual fund plans that allocate 35-65 per cent to equity, with the balance in debt, equity, or a mix of the two, will not get indexation benefits if they hold these instruments for three years or more after Tuesday’s budget announcements.
The new rules for capital gains on gold are applicable from July 23, 2024.
Previous rules Under the previous rules, indexation i.e. adjustment of inflation price was allowed while calculating long term capital gains on the sale of gold or gold jewellery.
Indexation allowed for the reduction of taxable capital gains by increasing the cost of acquisition price as per an index that tracks changes in inflation.
Before the changes made by the Union Budget, you had to own gold for 36 months before capital gains on it’s sale would count as long-term and would get taxed at 20 per cent.
In 2023, the government had said that any MF scheme which invests less than 35 per cent of its corpus in domestic equities will no longer enjoy indexation benefits. The tax on such schemes was brought at par with bank deposits, which is the individual slab rate.
The tax change was primarily targeted at debt MF schemes, however, all MF offerings with less than 35 per cent exposure to domestic equities ended up losing the tax benefits.
Implications of the New Rules
These amendments simplify the taxation process for gold investors by reducing the holding period and tax rate for long-term capital gains while removing the complex indexation calculation.
Investors must now weigh the benefits of a lower tax rate against the removal of indexation when considering the sale of their gold assets.
Source: https://www.news18.com