Govt to scrap long-term tax benefit for debt mutual funds investing less than 35% assets in equity


NEW DELHI: 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 submit such a proposal in the form of an amendment to the Finance Bill 2023 in the House, sources said.
The Finance Bill 2023, which contains tax proposals for the fiscal year starting April 1, is to be taken up for approval in the Lok Sabha as early as on Friday.
Once the amendments to Finance Bill 2023 gets Parliament assent, holders of mutual fund schemes which invest up to 35 per cent of their assets in equity shares would be taxed as per their slab rates.

The proposal will bring parity in taxation between a market-linked debenture and a mutual fund which invests majority of its funds in debts.

The finance ministry is anticipated to bring through revisions to the Finance Bill 2023, reducing the long term capital gains tax (LTCG) incentives provided to such selected MFs.

These mutual fund schemes currently offer 20% LTCG with indexation advantages.

According to Vishwas Panjiar, a partner at Nangia Andersen LLP, the Finance Bill 2023 includes special provisions for computing capital gains in cases where a market-linked debenture is transferred. This clause has now been extended to cover certain mutual funds as well, i.e. mutual funds whose maximum investment percentage in domestic company equity shares is 35%.

“Accordingly, in all cases, irrespective of the period for which the market-linked debenture and/or the specified mutual fund is held by the holder, gains arising from the transfer will be deemed to be short term capital gains,” Panjiar said.