Shares & Mutual Funds Taxation Guide – FY 2024-25 (AY 2025-26)

The Indian investment landscape is abuzz with the recent changes introduced in the Finance Act, 2024. For investors in the stock market and mutual funds, understanding these new tax implications is not only a matter of compliance but also a key part of smart financial planning.

This blog breaks down the updated rules for taxing income from shares and mutual funds under the Income Tax Act, 1961, as amended for FY 2024-25 (AY 2025-26).

A New Chapter in Capital Gains Taxation

The key changes relate to capital gains tax rates, revised holding periods for asset classification, and increased exemption limits for long-term gains.

Understanding Capital Gains: Short-Term vs. Long-Term

Your profit or loss from selling shares or mutual fund units is categorized as a capital gain. The tax you pay on this gain depends on how long you’ve held the investment. The holding period determines whether the gain is classified as Short-Term Capital Gain (STCG) or Long-Term Capital Gain (LTCG).

Here’s a snapshot of the revised holding periods:

Tax on Short-Term Capital Gains (STCG)

For investors who book profits within a shorter timeframe, the STCG tax rates are as follows:

Equity Shares and Equity-Oriented Mutual Funds (with STT):

The STCG tax rate has increased from 15% to 20% (plus surcharge and cess), encouraging longer holding periods.

Example:

• Buy Price: ₹1,00,000
• Sell Price (after 6 months): ₹1,20,000
• Capital Gain: ₹20,000
• Old Tax: ₹20,000 × 15% = ₹3,000
• New Tax: ₹20,000 × 20% = ₹4,000

Debt Mutual Funds and Other Capital Assets:

STCG is taxed as per your income slab rates.

Tax on Long-Term Capital Gains (LTCG)

The Finance Act 2024 has brought about a mixed bag of changes for long-term investors.

•  Equity Shares and Equity-Oriented Mutual Funds (with STT):
  • LTCG tax increased from 10% to 12.5% on gains exceeding the exemption limit.
  • Exemption limit raised from ₹1,00,000 to ₹1,25,000 per year.

Example:

• Buy Price: ₹1,00,000
• Sell Price (after 2 years): ₹2,50,000
• Total Gain: ₹1,50,000
• Exempt Amount: ₹1,25,000
• Taxable LTCG: ₹25,000
• Old Tax: ₹50,000 × 10% = ₹5,000
• New Tax: ₹25,000 × 12.5% = ₹3,125

Taxation of Dividends: A Consistent Approach

There have been no significant changes in the taxation of dividends in the Finance Act 2024. As per the existing rules:

• Dividends from both shares and mutual funds are added to your total income and taxed at your applicable income tax slab rates.
• TDS of 10% is applicable if dividend income exceeds ₹10,000 from a single company or mutual fund house in a financial year (earlier limit: ₹5,000).

Key Takeaways for Investors:

✅ Long-term investment is the new mantra for equity investors:

The increased STCG rate makes short-term trading in equities less attractive from a tax perspective. Holding on to your quality equity investments for more than a year can lead to significant tax savings.

 ✅ Small equity investors get a breather:

The enhanced LTCG exemption limit of ₹1.25 lakh is a welcome move for retail investors with smaller portfolios.

✅ Debt Fund Reassessment Required: 

Indexation benefits are removed; reassess your fixed-income strategy.

✅  Dividend income remains a part of your taxable income:

Remember to include all your dividend earnings while filing your income tax return.

Disclaimer:  Always consult a qualified tax professional before making any investment or tax-related decisions. Tax laws are dynamic and subject to periodic amendments.