The Government of India has now amended the Finance Bill 2023 to change the taxation of debt mutual funds in effect from 1.st April 2023. Earlier debt funds were used to gain indexing benefits lost in this move. What are the new debt mutual fund tax rules from April 2023? Will these rules affect capital gains from existing debt mutual funds?
Also Read: 5 Equity Funds That Have Recorded High Returns Over The Past Year
New tax rules for debt mutual funds from 1 April 2023
Let’s divide mutual funds into three buckets for better understanding.
> 65% of equity exposure – No change in tax rules for investment trusts
65% to 35% of equity exposure – No change to mutual fund taxation
< 35% of equity exposure – This is a big change. Mutual funds that invest less than 35% in equities are classified as non-equity mutual funds and, due to the new changes, do not benefit from indexing here. For all long-term capital gains (LTCG) or short-term capital gains (STCG), investors must pay income tax based on the applicable income tax slab.
Will this new rule affect existing mutual funds?
These new tax rules are effective from 1st April 2023. Represents a new investment in a debt mutual fund after this date and is subject to new tax rules.
1 Some mutual funds purchased previouslyst April 2023 should ideally be exempt. In other words, capital gains are taxed in the traditional way.
Will this new rule only affect debt mutual funds?
Besides Debt Mutual Funds, this change also affects returns from Gold Mutual Funds and International Mutual Funds. This is because these mutual funds also fall into the less than 35% equity exposure bucket.
Also Read: 5 Debt Mutual Funds with the Best SIP Returns of the Past Decade
Should I stop investing in new debt funds now?
A surprise move by the Indian government, no conclusions should be drawn on this until parliament has passed the new tax rules.
AMCs/Mutual Fund Houses should also align their existing or new mutual funds with this rule so that investors can easily understand the tax implications.
In some cases, AMCs or mutual fund houses may increase arbitrage exposure to 35% or more in mutual fund schemes. This puts it in the equity mutual fund segment and continues to benefit from indexation. Until then, investors may withhold new investments in debt mutual funds.
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Suresh KP is the founder of Myinvestmentideas. He is his NISM Certified – Investment Advisor and NISM Certified – Research Analyst. He has been analyzing financial markets for the past 20 years.
