Debt mutual funds will no longer enjoy the long term capital gain benefit of 20% taxation along with indexation benefit.
The government made this proposal today in the form of an amendment to the finance bill 2023. With this proposal, capital gain in debt funds bought after 1st April 2023 will be fully taxable even after completing 3 years. So far, debt funds attract capital gain taxation at the concessional rate of 20% along with inflation indexation benefit if they complete 3 years. But with these amendments, even after 3 years, the taxation will be as per the nominal tax bracket of the investors. This rule will be applicable for all the funds where domestic equity holding is less than 35%. Thus, all the debt funds, hybrid debt funds and international equity funds will be affected by this new tax rule.
There is no change in the taxation of Equity funds and Hybrid Equity Funds.
It is to be noted that in the budget announcement, Insurance saving schemes, where the premium is more than 5 Lakhs per annum, the gain was already declared as taxable. Thus they are now at par with debt funds from a taxation angle.
This new ruling may affect the sentiments of debt funds investors for the short term and they might consider bank fixed deposits as a better avenue. Some clients may even be inclined to switch their debt funds’ investments into equity or hybrid equity schemes. We advise investors not to do so in a hurry. Investment portfolio should be based on your financial plan and proper asset allocation and merely the taxation should not be the basis of any drastic changes in the portfolio.
Also, debt funds will continue to remain an integral part of clients’ portfolios because of transparency, liquidity, asset allocation convenience, and tax deferment benefits. Further, I am sure fund managers will find a way to deal with the situation. They may for example design a debt fund with 65% debt securities and 35% equity arbitrage opportunities. This combination would work almost similar to debt funds but with lower taxation.
The opportunity to enjoy the old tax benefit is available till 31st March, so by investing in debt funds you can avail this opportunity.
Manoj Pandey
CFP
