In a major blow to debt fund investors, a proposed amendment to the Finance Bill, 2023, is said to likely take away the benefit of 20 percent tax with indexation benefit that debt mutual funds currently enjoy.
This is based on a copy of the proposed amendments to the Finance Bill, 2023, that has been circulating on social media and WhatsApp groups. One industry person told Moneycontrol there is no official confirmation of this.
According to this document, gains on redemption of specified mutual funds (where not more than 35 percent is invested in equity shares of domestic companies) that are bought on or after April 1, 2023, will be taxed as short-term capital gains.
That is, capital gains from debt funds, international funds and gold funds, irrespective of their holding period, will be taxed at an individual’s relevant tax slab. According to the industry person, the proposed amendment may also cover funds of funds, which invest in units of other mutual funds.
However, more clarity is needed on this. Currently, gains on all these funds, where the holding period is over three years, are taxed at a lower rate – 20 percent with indexation benefit.
If this benefit is removed, it will take away the tax advantage that debt funds enjoyed over fixed deposits. Interest income from fixed deposits is taxed at an individual’s income tax slab rate. With the indexation benefit gone, debt funds will come at par with fixed deposits on the taxation front.
However, existing investments in debt funds, international funds and gold funds, and even new investments made in them until March 31, 2023, won’t be affected by the proposed amendments. They will continue to enjoy the favourable long-term capital gains taxation.
According to ET, The proposed changes are likely to be part of the finance bill amendments that could be tabled in the parliament on Friday