Debt mutual funds are likely to be stripped of the long-term tax benefit if they invest less than 35 per cent of their assets in equities. Such mutual funds will attract short term capital gains tax. The government is likely to make such a proposal in the form of an amendment to the Finance Bill 2023 in the Parliament, media reports said. According to personal finance experts, such proposals will bring bank fixed deposits (FDs) on-par with debt mutual funds.
Tax and investment expert Balwant Jain
The amendment to finance bill 2023 related to debt mutual fund has unintendedly created three categories of mutual funds for taxation.
1) Equity-oriented plan with at least 65% equity.
2) Schemes having not more than 35% equity to be taxed as short term capital gains.
3) Mutual funds that are eligible for indexation and are subject to a 20% tax rate and have more than 35% but less than 65% equity.
Bhavik Thakkar, CEO-Abans Investment Managers
Usually, government makes changes in budget proposals post receipt of feedback/suggestions before the budget gets passed by parliament. The current session of parliament is expected to pass budget on Friday, 24th March 2023.
The government made a new amendment to the budget to classify any capital gains from mutual funds that are 100% invested in debt assets, such as all debt funds or hybrid funds, as short-term capital gains that are subject to tax at the investor’s slab rate. This would mean that for debt and hybrid MF, there will be practically no difference between short term and long term.
Taxes for Market Linked Debentures (MLD), Fixed Deposits, and Debt MF will now be equal.
Edelweiss Asset Management Limited’s managing director and chief executive officer is Radhika Gupta.
I hope the proposed change in the Finance Bill to remove LTCG with indexation status on debt funds is reviewed. Financialization is only begun in India and a vibrant corporate bond market needs a strong debt MF ecosystem.”
These mutual fund schemes currently offer 20% LTCG with indexation advantages.
Siddharth Maurya is a resource specialist with expertise in fund management and real estate.
The government’s proposed Finance Bill states that investments made in mutual funds containing no more than 35% equity shares of Indian enterprises will be regarded as short-term capital gains. This change will be applicable for investments made on or after April 1, 2023. For debt funds held for longer than three years, the indexation benefit will be eliminated, and they will no longer qualify for a 20 percent tax rate.
The indexation advantage was one of the primary drivers pushing investments in debt, gold, and overseas funds. Target maturity funds and the fixed income category in general tend to have less of a presence from retail investors. Thus, high net worth people and international clients are likely to be more affected by the changes.
Debt funds constitute a significant portion of our portfolio, and they have effectively directed a substantial amount of money into the bond market. Nonetheless, there has been a chronic problem with the bond market’s liquidity in India, which may lead some investors to switch their money to fixed deposits. Long-term investments in debt funds would mostly be affected by this change.
For annual investments up to 5 lakh, life insurance products are preferable than debt mutual funds from a taxation perspective. Nonetheless, life insurance and debt mutual funds are now similar for yearly investments over 5 lakh, which is an improvement over the pre-FY24 budget condition.