Rising AUM and Taxation: The Assets Under Management (AUM) of Mutual Funds in the industry have surged to ₹46 trillion, showing an increased burden of taxes.
Government increases Taxation
The Indian government had previously increased the Long-Term Capital Gains (LTCG) tax for mutual fund schemes as part of its fiscal plans in 2014. This change led to an increased tax burden on mutual fund investors.
Mutual Funds AUM Raises
Over time, various alterations in tax regulations have affected mutual fund investors negatively, with the AUM reaching ₹44.39 trillion by June 30, 2023, and later hitting ₹46.57 trillion by September. These changes in tax rules impacted the investments and profits of mutual fund investors.
The government’s modifications included raising the LTCG tax from 10% to 20%. Additionally, the holding period for long-term debt fund units was increased from 12 to 36 months, causing significant disruptions for mutual fund investors in the fiscal year 2022-23.
To comply with tax regulations, mutual fund schemes were divided into three categories based on their equity investment percentages. These categories are taxed differently: schemes with over 65% equity investments face higher taxes, while those below 35% enjoy tax benefits.
Furthermore, in 2018, a 10% tax was imposed on equity mutual fund gains exceeding ₹1 lakh. This decision surprised the stock market stakeholders.
ELSS Growth and Tax Benefits
Under the leadership of Narendra Modi’s government, Equity Linked Saving Schemes (ELSS) grew to ₹1.75 trillion by June 30, 2023, from ₹30.23 trillion in June 2014. The government had earlier raised the limit of Section 80C of the Income Tax Act from ₹1 lakh to ₹1.5 lakh, allowing investments in ELSS and other instruments up to ₹5 lakh to avail tax benefits. ELSS falls under Section 80C and has become a popular investment avenue. changes in tax regulations significantly impacted mutual fund investments, prompting alterations in fund categorization and taxation structures.
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