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2 min read 24 Mar 2023, 11:31 AM ISTJoin us 
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Debt funds held for more than three years will no longer enjoy indexation benefit
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In a major setback for Mutual Fund (MF) investors, the government may do away with the long term capital gain (LTCG) tax benefit benefits that a debt fund mutual investors enjoy. According to the proposed amendments, in the Finance Bill 2023, investment in mutual fund where not more than 35 percent is invested in equity shares of Indian company will now be deemed to be short-term capital gains. This will apply to investments made on or after 1 April 2023. Currently, investors in debt funds pay income tax on capital gains according to the income tax slab for a holding period of three years. After three years these funds pay either 20% with indexation benefits or 10% without indexation.
The proposed changes are likely to be part of the finance bill amendments that could be tabled in the parliament on Friday.
Tax and investment expert Balwant Jain said that the amendment to finance bill 2023 related to debt mutual fund has unintendedly created three categories of mutual funds for taxation.
1. Equity oriented scheme having minimum 65% equity.
2. schemes having not more than 35% equity to be taxed as short term capital gains.
3. Mutual funds having more than 35% but less than 65% equity, eligible for indexation and to be taxed at 20%.
One of the biggest reasons for investing in debt funds is the tax advantage they offer over fixed deposits. Also, debt funds held for more than three years will no longer enjoy indexation benefit.
The proposed changes will also be applicable for gold, international equity and even domestic equity funds of funds (FoFs).
All existing investments and new investments made before 31 March will not be affected by this proposed tax change.
Radhika Gupta - Managing Director & Chief Executive Officer, Edelweiss Asset Management Limited, in a tweet said, “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."
The success of a program like Bharat Bond and target maturity funds in the last year was just the beginning of what could have been a lot of innovation in the bond category, added Radhika Gupta in another tweet.
According to tax experts, this proposal is likely to give a boost to bank fixed deposits.
Another major announcement in Budget 2023 was related to market-linked debentures (MLD), which are also proposed to be taxed as only short-term capital gain.
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Published: 24 Mar 2023, 09:19 AM IST
