How the Centre’s decision to tax mutual fund earnings will affect you
A debt fund is a mutual fund that invests in fixed income instruments. (Representative)
New Delhi:
The Center is considering removing long-term tax benefits for mutual funds. It has proposed taxing investments in debt mutual funds as short-term capital gains through amendments to the Finance Bill 2023. Under the proposed ruling, mutual funds in which less than 35% of the investments are made in equities will be treated as short-term mutual funds. term. The benefit of indexing these funds will also be removed, which will likely increase the tax burden on investors.
What are mutual funds?
According to the Association of Mutual Funds in India, a debt fund is a mutual fund that invests in fixed income instruments such as corporate debt programs, government and corporate bonds, money market instruments and corporate debt securities.
How are debt mutual funds currently taxed?
Debt funds held for more than three years are subject to tax according to the investor’s income tax plate. For a holding period of more than three years, investors must pay 20% tax with indexation or 10% tax without indexation on gains from debt funds.
What is the benefit of indexing?
Indexation reduces the tax payable for investors because the tax is calculated after taking inflation into account. The government has now proposed to remove this benefit. Once the decision takes effect, debt funds will be taxed in the same way as term deposits. Even long-term capital gains from debt funds will be taxed as short-term capital gains.
What impact will it have?
Experts say the proposed decision will impact seniors and businesses, as well as people who are hesitant to invest in stocks and take a higher financial risk. It could also give a boost to bank deposits which have seen slow growth relative to credit demand over the past 12 months.
Investors will likely start to prefer fixed deposits to debt funds once the indexing advantage wears off. “The proposal would remove the tax advantage for these funds and investors could resort to other options such as time deposits,” AKM Global’s tax partner Amit Maheshwari told Financial Express.
According to Gaurav Rastogi, CEO and Founder of Kuvera.in., the move “will lead to higher yields on corporate debt so investors get the same after-tax returns,” CNBC-TV18 reported.
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