The latest proposed amendment to the Finance Bill 2023 classifying capital gains arising from debt mutual funds as short-term gains will increase the tax burden on investors.
As per the amendment, debt funds having not more than 35 per cent invested in equity shares would be taxed at the income tax slab level and treated as short term capital gain.
Subsequently, gains arising from debt mutual funds will be added to investors taxable income and will be taxed at income tax slab rate.
Currently, the short-term capital gain from debt funds is taxed as per individual tax slab if redeemed before three years.
Tax advantage
Radhika Gupta, MD and CEO, Edelweiss MF said financialisation is just happening in India and a vibrant corporate bond market needs a strong debt mutual fund ecosystem.
The success of programmes like Bharat Bond and target maturity funds last year was just the beginning of what could have been a lot of innovation in the bond category, she said.
Currently, one of the main reasons for investing in debt funds is the tax advantage they offer over fixed deposits. If a debt fund is held for over three years, the investor pays long-term capital gains tax at 20 per cent with indexation benefit while interest from the fixed deposit is taxed as per investors’ tax slab.
Hence, the post-tax returns for debt mutual funds are higher than the post-tax returns of bank fixed deposits.