Other Mutual Funds

Since FY 2023-24, every mutual fund for tax purposes falls into one of four boxes: equity-oriented, one of two kinds of Specified Mutual Fund, or Other Mutual Funds. This last box is the ordinary case, the one that still runs on the familiar period-of-holding rules, untouched by Section 50AA.

If a fund does not meet the 65% debt-or-money-market test, and did not fall into the narrow, time-limited Type 2 Specified Mutual Fund window, it stays here, taxed the way mutual funds were taxed before the 2023 changes arrived.

The classification it belongs to (Chapter 10, section 10.3.2): Equity-oriented Mutual Funds; Specified Mutual Funds Type 1, being funds with 65% or more in debt or money market instruments, bought after 1 April 2023; Specified Mutual Funds Type 2, a narrow, time-limited category; and All Other Mutual Funds.

How gains are taxed (section 10.3.6):

• Long-term. Units of Other Mutual Funds that are listed are long-term if held for more than 12 months; unlisted, the threshold rises to 24 months. Long-term gains are taxed at 12.5%.
• Short-term. Gains on units held for less than the applicable threshold are taxed at the assessee's normal slab rate.

Unlike a Specified Mutual Fund, an Other Mutual Fund is not deemed short-term regardless of holding period. The ordinary long-term or short-term test, and its more favourable 12.5% rate for genuinely long holdings, still applies here.

Mr A buys 1,000 units of a debt-oriented mutual fund at Rs 150 each on 1 January 2017, and sells them at Rs 300 each on 15 March 2025, a gain of Rs 1,50,000.

Because these units were bought before 1 April 2023, Section 50AA's Specified Mutual Fund rule never touches them; they remain an Other Mutual Fund for tax purposes. Held for over 8 years, well past the 24-month unlisted threshold, the gain is long-term:

Full value of consideration (1,000 x 300)   Rs 3,00,000
Less: cost of acquisition (1,000 x 150)     Rs 1,50,000
Long-term capital gain                      Rs 1,50,000
Tax at 12.5%                                Rs   18,750

Compare an identical fund bought instead on 10 June 2023 and sold with the same gain after the same period: because that purchase date is after 1 April 2023, and assuming the fund invests 65% or more in debt or money market instruments, it would instead be a Specified Mutual Fund, with the entire Rs 1,50,000 taxed as short-term at slab, potentially 30% instead of 12.5%, a difference of over Rs 26,000 in tax on an identical gain, decided purely by the purchase date.

Chapter 10, sections 10.3.2 and 10.3.6, defines the four-way classification and works Example 12, the 2017-to-2025 debt fund holding, as the Other Mutual Funds computation. The Specified Mutual Fund entry in this same file cross-references this category directly, since the two are opposite outcomes of the same 1 April 2023 cut-off test. Expect a purchase-date-driven question testing whether a fund is an Other Mutual Fund or a Specified Mutual Fund.

• The purchase date, relative to 1 April 2023, decides which of the four boxes a fund falls into, not the fund's name or investment style alone.
• Listed units need 12 months for long-term; unlisted need 24 months, the same split used for other capital assets, but easy to apply the wrong threshold.
• Other Mutual Funds still get the benefit of the long-term or short-term distinction. This is the single biggest difference from a Specified Mutual Fund, which does not.
• A fund bought before 1 April 2023 stays an Other Mutual Fund for that holding, even if the same fund would be a Specified Mutual Fund for units bought afterwards. The test runs unit lot by unit lot, not fund by fund.