📚 PASS Investment Adviser (Level 2) Difficulty: Beginner ℹ️ Info   ~5 min read
📌 Chapter 10.3 — Mutual Funds

Imagine you are reviewing a client’s portfolio transition for the upcoming financial year. A client holds a substantial position in an international feeder fund, which falls under the ‘Specified Mutual Fund’ category—investing less than 65% in domestic equity. The client is debating whether to redeem these units now or wait until after April 1, 2025, to rebalance their asset allocation. As an advisor, you must understand that the tax treatment for these instruments shifts permanently after this date, altering the fundamental post-tax return profile for the investor.

Under current regulations, units of Specified Mutual Funds acquired after April 1, 2023, are taxed at the investor’s applicable slab rate regardless of the holding period. This treatment is a structural change from the previous regime, where long-term capital gains were subject to concessional tax rates with indexation benefits. For sales occurring before April 1, 2025, the tax liability remains tied to the marginal slab rate, effectively treating all gains as short-term income.

This parity with bank interest income removes the historical tax advantage that debt-oriented or international funds once held over traditional fixed-income products.

Post-April 1, 2025, the classification remains rigid for units acquired within the specified window. While some investors might hope for a reversion to historical long-term capital gains treatment, the current fiscal framework categorizes these gains strictly as income. Consequently, when evaluating whether to liquidate such positions, the ’tax drag’ must be explicitly modeled into your recommendation.

A client in the highest tax bracket will face a 39% effective tax rate on these gains, which can drastically reduce the net internal rate of return (IRR) of the investment compared to other, more tax-efficient vehicles.

Consider a case where an investor holds international equity units with a gain of ₹10 lakhs. If sold today or any time before April 1, 2025, the investor pays tax at their marginal slab. Post-April 2025, the gain remains taxable at the slab rate, but the lack of indexation or concessional long-term rates creates a permanent, non-negotiable tax burden. As an advisor, your task is to shift the client’s focus from nominal returns to post-tax yields.

Unless the underlying international asset exhibits significant alpha, the tax friction often necessitates a transition to domestic equity-oriented funds where long-term capital gains are taxed at 12.5% above a specific threshold.1

Nuance

⚠️ Nuance
Candidates often erroneously believe that holding a ‘Specified Mutual Fund’ for more than 24 or 36 months will eventually trigger a change in tax status, reverting to a lower long-term rate after a certain date. This is a critical misconception; the law introduced for units acquired post-April 1, 2023, is absolute. The tax status of these units is ’locked’ at the time of purchase, meaning the gain is always treated as short-term income regardless of how long the investor keeps the asset in their portfolio.

Check Your Understanding

Practice Question 1

An investor purchased units of an international mutual fund (investing 90% in foreign stocks) on June 15, 2024. If the investor sells these units on May 10, 2025, how will the capital gains be taxed?

Practice Question 2

Which of the following best describes the tax rationale for the ‘Specified Mutual Fund’ category introduced in the 2023 Finance Act?

This is a companion read for Section 10.3 — Mutual Funds from PASS Investment Adviser (Level 2) by Akhilesh Gururani, available on Amazon Kindle.

Copyright © 2026 Akhilesh Gururani. All rights reserved.

  1. The 12.5% tax rate applies to long-term capital gains exceeding ₹1.25 lakh for equity-oriented funds, representing a shift from the previous ₹1 lakh exemption limit. ↩︎