The Finance Bill 2023 was approved by the Lok Sabha on Friday with over 45 amendments. One of the major changes is that now capital gains from debt mutual funds will be considered as short term capital gains.
With the amendments made in Budget 2023, now there will be no benefit of indexation in calculation of long term capital gains on debt mutual funds from April 1, 2023. Debt funds having not more than 35 percent invested in equity shares would be taxed at the income tax slab level and treated as short term capital gain. Bank fixed deposits are also taxed in a similar manner.
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So far, debt mutual funds were treated as long-term investments if held for more than 3 years and taxed at the rate of 20 percent along with indexation benefits or 10 percent without indexation. For those holding less than 3 years, they pay tax as per their tax slab.
What should debt mutual fund investors do now?
If as an individual investor, you want to avail the tax benefit of indexation, then you have got a small window to invest in debt mutual funds till March 31, 2023. The investments made in debt mutual funds till March 31, 2023, will continue to get the indexation benefit till the investments are redeemed from mutual funds.
The amendment to the Finance Bill, which will now be sent to the Rajya Sabha, is also applicable for gold, international equity and even domestic equity fund of funds (FoFs). The amendments would be applicable from April 1, 2023.
It should be noted that the government has not made any change in taxation of equity shares and equity mutual funds. They will continue to be taxed at 10 percent without indexation benefit, provided LTCG exceeds Rs 1 lakh in a financial year.
Most investors prefer investing in debt mutual funds as compared to bank fixed deposits because there is a tax advantage. The interest earned on bank fixed deposits is taxed at the income tax rate applicable to your taxable income.
As part of the Indexation benefit – a tax benefit available to investors who invest in debt mutual funds in India — the investor is allowed to adjust the cost of acquisition of the mutual fund units based on the inflation index of the year in which the investment was made and the year in which the units were sold. The idea behind indexation is to adjust the cost of acquisition of the mutual fund units to reflect the inflation during the holding period.
Indexation helps to reduce the tax liability of investors in debt mutual funds as it takes into account the impact of inflation on the value of their investment. This means that the cost of acquisition of the mutual fund units is adjusted upwards, resulting in a lower taxable gain, and hence, a lower tax liability.
