Proposed Finance Bill tweak: Here's how fund managers, corporates, market voices are reacting

The bill has proposed that investments in mutual fund where not more than 35 percent is invested in equity shares of Indian company. If approved by the Parliament, will be applicable to investments made on or after April 1, 2023.

Around 35 percent of debt category is impacted, according to DP Singh of SBI MF. Ex-liquid funds, debt fund AUM is about Rs 4.5 lakh crore. With targeted maturity funds, AUM goes up to about Rs 6 lakh crore, he added.

Radhika Gupta, MD & CEO of Edelweiss Mutual Fund tweeted, ''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 Gupta.

Also, as per the proposal debt funds held for more than three years will no longer enjoy indexation benefit. Additionally, they will not be eligible for 20 percent tax rate. ''The larger purpose of debt funds was better price discovery. This move has come has as a surprise, and we will make a representation. I expect debt funds to continue to play a larger role,'' said A Bala, Chairman, Association of Mutual Funds of India (AMFI).

''Mutual funds also re-invest the money in capital intensive areas. Corporates will need to relook at routing their corpus into debt funds, in light of this proposal,'' said Seshagiri Rao of JSW Steel.

Presently, debt fund investors seek tax advantage over FDs. Indexation benefit was one of the key advantages of investing in debt funds. With indexation benefit, taxes are calculated accounting for inflation. However, interest earned on fixed deposit is taxed as per individual's income tax slab.

Kirtan A Shah, founder of Credence Wealth Advisors also responded to the latest Finance Bill tweak. ''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.''

Shah explained that Indexation is an advantage in which if one's fund generates eight percent return over 3 years and inflation in the same period was six percent, you pay a 20 percent 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%.

''This was amongst the major reasons why Gold and Debt MF investing was popular & it actually helped financialise investments from physical gold and FDs to capital markets using Mutual Funds,'' added Shah.

Deepak Shenoy, founder and CEO of SEBI-registered portofolio manager Capitalmind Wealth PMS expressed disappointment over the Fiance Bill tweak. ''This amendment will classify every debt fund as only short term capital gains! As in no long term capital gains will apply. This is a very bad step,'' he wrote on Twitter.

This is a little disappointing for the mutual fund industry. If someone is drawing interest on a quarterly basis, it will still be better than FD. If one draws interest quarterly, could defer tax as opposed to in case of FD,'' added Shenoy.