If debt mutual fund investments are held for over three years, gains will be treated as long term capital gains and taxed at 20% with indexation benefit. Indexation helps investors to bring down taxes as it calculates the taxes after accounting for inflation. In a high inflation environment, indexation brings down the taxes significantly.
Several mutual fund officials and advisors shared their anguish on various social media platforms. “I hope the proposed change in the Finance Bill to remove LTCG with indexation status on debt funds is reviewed. Financialization is just happening in India and a vibrant corporate bond market needs a strong debt MF ecosystem,” tweeted Rahika Gupta, CEO, Edelweiss Mutual Fund.
“Indexation advantage of Mutual Funds for investing in Debt, Gold & International equity is going as per the finance bill…Amongst the worst decisions given the under penetration of the capital markets specifically on the debt side,” tweeted Kirtan A Shah, founder & CEO, Credence Wealth.
He offered an example of indexation benefit. “Indexation is an advantage in which if your fund generates 8% return over 3 years and inflation in the same period was 6%, you pay a 20% tax on the difference 8-6 = 2%. So a total tax of 2*20% = 0.4% making your post tax at 8-0.4 = 7.6%,” he tweeted.
The proposed change may have an impact on debt mutual funds as investors no longer have any advantage of investing in debt funds. It may also adversely affect the bond market.
