Amendment to Finance Bill 2023 scrapped the indexation benefit on debt mutual funds. They will now be taxed at investor’s slab rates. These changes will bring the taxation of specified mutual funds at par with fixed deposits. Read on to know how this move may impact you and everything about the taxation of debt mutual funds.
The Budget 2023 has brought about certain amendments that imply that a Specified Mutual Fund will no longer receive indexation benefits when computing long-term capital gains(LTCG). Therefore, debt mutual funds will now be taxed at the applicable slab rates.
Moreover, indexation benefits will not be available for LTCG on gold mutual funds, hybrid mutual funds, international equity mutual funds, and funds of funds (FOF). Consequently, mutual fund houses are likely to be adversely affected as investors may prefer to invest directly in debt securities rather than debt mutual funds to avoid AUM fees/charges. The change may also impact the attractiveness of these mutual funds as an investment option, as the tax burden on the profits may increase.
arlier, the taxation of debt mutual funds was governed by the holding period rule:
- Short-Term Capital Gains: If the debt mutual fund unit is sold within 36 months (three years) of purchase, the gains are termed short-term capital gains (STCG). These STCGs were taxed at slab rates.
- Long-Term Capital Gain: However, if they were sold after 36 months, then the gains were termed long-term capital gains (LTCG). These long-term capital gains were taxed at 20% with an indexation benefit. Indexation benefit means the gains made by investors were adjusted for inflation. This is illustrated in the table below.
