How will the amendment in the finance bill 2023 affect debt mutual funds?
As per an amendment in the Finance Bill 2023, beginning April 1, capital gains arising from debt oriented mutual fund schemes will be treated as short-term capital gain, irrespective of the period of holding. Investors in such schemes will have to pay tax in line with their income slab. Until now, investors in such schemes are eligible for indexation benefits on capital gains if the instruments are held for more than 3 years. This means investors holding for more than 3 years will have to only pay a 20% long-term capital gains tax after indexation, which significantly reduces their tax liability.
Will there be any impact on equity oriented schemes?
Equity schemes or hybrid funds that have 65% in equity or equity plus arbitrage with the remaining in fixed income are treated as equity schemes for taxation. Categories like equity funds, aggressive hybrid funds, equity savings fund, arbitrage funds and dynamic asset allocation funds and some multi asset allocation funds will be taxed as equity funds, where investors will continue to pay 15% short-term capital gains tax if held for less than a year and a 10% long-term capital gains tax if sold after more than a year.
Which categories of mutual fund schemes will be affected?
In addition to debt mutual fund schemes, there are several other categories that are treated as debt for taxation, which will lose indexation benefits. Categories like conservative hybrid, fund of fund investing overseas, domestic FoF, and gold /silver funds will be affected and will not get indexation benefits. Some multi asset allocation funds that have 0% to 35% equity will also lose indexation benefit.
Why was indexation helpful for investors?
Indexation helped investors beat inflation. Using Indexation one could account for inflation in the gains made in debt funds so that the tax outgo is reduced. This helps in giving investors post-tax returns which are above inflation. Indexation is done through a mechanism that uses the cost inflation index (CII), which is adjusted for inflation both at the time of purchase of an asset as well as its sale.
Why is there a rush to invest in debt mutual fund schemes?
All investments made before March 31 will be eligible for indexation benefits.
