This article describes a tweak that investors can implement to plan taxes more efficiently, given that non-equity funds will be taxed at slab rates after 1st April 2023.

📚 Table of Contents

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• What changed on 24th March 2023 on mutual fund taxation?
• FIFO and different folio rules
  • FIFO rule
  • Different folio rule
• Buying these mutual funds from 1st April 2023 onwards
• Can the older folios be continued for new units in these funds from 1st April 2023?

What changed on 24th March 2023 on mutual fund taxation?

The Finance Ministry, in a surprising move, made all profits taxable at slab rate from most mutual funds that previously had long-term capital gains taxed at 20% post indexation. This rule applies only to units purchased after 1st April 2023. The 20%-post-indexation rule is still applicable to units purchased before 1st April 2023.

The following mutual fund categories are now taxable at the investor’s marginal tax rate or slab rate for all holding periods for units purchased after 1st April 2023. As a result, all mutual funds in the following categories have the same tax calculation irrespective of how long they are held.

• Debt: debt mutual funds (17 categories of funds impacted)
• International: funds that invest in international stocks or ETFs
• Hybrid: hybrid funds like conservative hybrid, multi-asset and dynamic asset allocation funds
• Gold/Silver: gold and silver mutual funds and ETFs
• Fund of Funds: any fund of fund that invests in a combination of equity or debt funds or both equity and debt funds

Therefore, the rule applies to any mutual fund with a lower than 35% holding in Indian stocks. For any unit in these funds purchased before 1st April 2023, the taxation will continue to be:

• STCG: at marginal tax rate if held for less than 3 years
• LTCG: at 20% with indexation benefit if held for more than 3 years

As always, a surcharge is applicable on any tax paid as per current taxation rules.

Please read through this article to understand more details on the taxation change: What should debt, international and gold mutual fund investors do now that these funds are taxable at slab rate?

FIFO and different folio rules

FIFO rule

First-in-first-out (FIFO) is the rule that needs to be followed when you are selling shares and mutual funds. The oldest shares/units are the ones that are used for calculating the purchase price.

Date	Folio	Transaction	Units	Price
D1	A	Buy	100	50
D2	A	Buy	100	60
D3	A	Sell	50	70
D4	A	Sell	70	80

In the example above, there are two buys and two sells. The units sold on D3 were purchased on D1 at price 50. The purchase value is ₹50 * 50 = ₹2500. The sold value is ₹70 * 50 = ₹3500.

For the 70 units sold on D4, 50 were purchased on D1 at ₹50/unit and the rest 20 were purchased on D2 at ₹60/unit. The profit on the first 50 units is ₹(80-50) * 50 = ₹1500 and that on the last 20 units is ₹(80-60) * 20 = ₹400.

Different folio rule

Mutual funds held in different folios have different tax treatments. The first-in-first-out rule applies to units at a folio level. Suppose there are two folios A and B, where the units in B are bought after those in A and later sold, then only those in B will be considered for tax calculation.

Date	Folio	Transaction	Units
1	A	Buy	100
2	B	Buy	100
3	B	Sell	50

In the example above, for tax computation, only those units from Folio B are considered.

Buying these mutual funds from 1st April 2023 onwards

New units in the impacted funds should be purchased in a new folio from 1st April onwards. Older units, i.e. those purchased before 1st April 2023, should be left as is. The basic premise here is that the old 20%-post-indexation tax benefit is still there in the older units, which need not be sold, due to the FIFO rule, when there is a need for selling these funds.

For example, you have 1000 units in a debt fund purchased more than three years ago kept in Folio X. These units are eligible for LTCG as per the old rule.

You are planning to invest 100 units more today. If you invest in the existing folio X and sell 50 units a year from now, the oldest 50 units in X with lower tax will be sold off. Depending on the prices at which these units were purchased, one of the two folios will have a lower tax payable, and you can choose that. You do not have that choice if you have only one folio.

Can the older folios be continued for new units in these funds from 1st April 2023?

Your older folios can be used without any hassle. The only downside is that a few years later, you need to carefully calculate the cost price, with or without indexation, based on the purchase date being before or after 1st April 2023.