When the entire nation is validating that all the necessary tax investments have been made before the year closes to claim exemption while filing the tax return, our government has decided to incentivize us by changing the tax structure on debt mutual funds. Last week, our Hon’ble Finance Minister, Smt. Nirmala Sitharaman decided to take away the income tax benefit given to debt fund investors from 01.04.2023.
In the proposed amendment, returns earned from debt mutual fund not having more than 35% investment in equity will be taxed at slab rate and not as capital gains. Generically, both debt mutual funds and bank deposits have similar characteristics. Hence this amendment is made to bring the existing difference in the tax treatment of debt funds in line with bank deposits.
In the existing tax system, long-term capital gains on debt mutual are taxed at 20% with the benefit of indexation or 10% without indexation. Short-term capital gains are taxed at slab rates. But after the tax amendment, from 01.04.2023, any return earned from debt mutual funds will be taxed at slab rates. However, investors can benefit from indexation for all the transactions made till 31.03.2023.
This amendment is expected to change our country’s existing bond and deposit market structure. Debt mutual funds play an essential role in developing India’s debt capital market. This tax may affect the development of the Indian debt market.
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| Particulars | Till 31.03.2023 | From 01.04.2023 |
|---|---|---|
| Debt mutual fund sold before holding for 3 years | Taxed at slab rate | Taxed at slab rate |
| Debt mutual fund sold after holding for 3 years | Taxed at 20% with indexation/ 10% without indexation | Taxed at slab rate |