Changes in Taxation On Investment Products in the Latest Budget
The recent Budget announcement has brought significant changes in the taxation of investment products, particularly favoring commodity and international exchange-traded funds (ETFs). One of the key alterations is the adjustment of the minimum holding period for eligibility for long-term capital gains (LTCG) taxation.
Under the new regulations, assets listed on stock exchanges require a 12-month holding period to qualify for LTCG taxation, whereas all other assets demand a longer 24-month holding period. Consequently, the tax implications on assets such as gold, silver, and international equities will vary based on the mode of investment.
Notably, gold, silver, and international ETFs are eligible for the 12.5% LTCG taxation in just 12 months due to their listing on exchanges. Conversely, investors utilizing the physical or mutual fund route for these assets will have to wait for 24 months to avail the LTCG benefits.
In a remarkable shift, the holding period for all listed assets has been standardized to one year. As a result, the holding period for listed units of business trusts (ReITs and InVITs) has been reduced from 36 months to 12 months. Similarly, the holding period for gold and unlisted securities (other than unlisted shares) has been truncated from 36 months to 24 months, as stated by the income tax department in their FAQs.
While it appears that ETFs may have a taxation advantage in the realm of commodities and international equities, there is an air of anticipation within the industry for further clarity on the matter.
According to senior mutual fund executives, the changes prima facie suggest that ETFs will benefit from preferential taxation in the case of commodities and international equities. However, the industry eagerly awaits more explicit details.
Deepak Shenoy, CEO of Capitalmind, highlighted the nuanced distinctions, stating that a Nasdaq 100 ETF is considered long-term after just one year. In contrast, the Nasdaq fund of funds is categorized as long-term only after two years. Additionally, all listed securities and bonds (excluding bond ETFs or listed debt funds) fall under the long-term category after one year. It’s worth noting that bond ETFs are perpetually categorized as short-term.
Interestingly, debt ETFs, despite being listed on exchanges, do not qualify for LTCG taxation as they fall under the ‘specified mutual fund’ category. Furthermore, any mutual fund product, including ETFs, allocating over 65% of assets in bonds and money market instruments, is taxed based on the investor’s slab rate, regardless of the holding period.
While this new structure has introduced certain ambiguities regarding the holding period for LTCG taxation, it’s been clarified that the short-term capital gains tax on commodity and international ETFs will be in accordance with the investor’s slab rate. This is in contrast to the 20% tax applicable on listed equities, as highlighted by Niranjan Avasthi, senior vice-president and head of product, marketing, and digital at Edelweiss Asset Management.
