Debt Mutual Fund, Gold ETF to be taxed as Normal Income
There are various changes which have been carried out in the Finance Bill-2023 as presented by the Finance Minister Smt. Nirmala Sitharaman on 1st Feb 2023. Finance Bill-2023 has been passed by Lok Sabha with over 45 amendments. There are two important amendments which may be relevant for the various categories of the taxpayers. Let us have a look at it:
I] Change in the taxation of Capital gains from Debt Mutual Funds:
- One of the biggest reasons for investing in debt mutual funds is the tax advantage associated with it as compared to the fixed deposits. At present, capital gains arising from transfer of mutual fund units, other than equity-oriented funds which are held for more than 3 years are considered as Long Term and taxed @ 20%. Further, such investment is also eligible for the indexation benefit thereby resulting in the reduced taxable income.
- During the passage of the Finance Bill – 2023 at Loksabha, an amendment has been proposed to treat gains from transfer of units of Specified Mutual Funds (SMF) as Short Term Capital Gain (STCG) and resultantly it will be taxable at applicable slab rates. This is in addition to taxation of market linked debenture proposed in the original finance bill. SMF has been defined to include funds where not more than 35 % of proceeds is invested in shares of domestic companies. Going by the definition of SMF, it will also include Debt Mutual Funds, Gold ETFs, International Equity Mutual Funds, Fund of funds, Hybrid Mutual Funds etc as investment in all such cases in domestic companies is less than 35% of the fund.
- As a result of the proposed amendment, Gains from SMF purchased on or after 01st April 2023 will be taxable as STCG at applicable normal tax rate irrespective of holding period. It is now almost at par with FDs. The holding period will not at all be relevant for taxation of the SMF. Such STCG will be just added to other income & taxable according to the applicable income tax slab.
- Impact of Amendment:
Taxation benefit is one of the key considerations for investment in the debt fund by the investor. The said amendment will bring parity in taxation of bank fixed deposits and debt mutual funds. The amendment would impact individuals in the highest tax bracket who used to invest in debt securities through mutual funds to take advantage of the tax arbitrage. There is no change in taxation of equity shares and equity mutual funds. They will continue to be taxed at 10% without indexation benefit, provided LTCG exceeds Rs 1 lakh in a financial year.
- Effect on the existing investments in Debt Fund?
The proposed amendment shall cover transfer of the units of SMF acquired on or after 1 April 2023. It means that investments made in these debt mutual funds up to 31.3.2023 will continue to have the benefit of the existing LTCG taxation regime. Few investors who already have investment in the debt fund may remain invested so as to get the concessional tax treatment at the time of its redemption.
II] Marginal Relief to the Taxpayers opting for New Tax Regime with income slightly above Rs. 7 Lakh:
- Originally, Section 87A was providing for a maximum tax rebate of Rs. 12,500/- to a resident individual if total income does not exceed Rs. 5 Lacs.
- The Finance Bill, 2023 has widened the scope of deduction under section 87A so as to cover the individual taxpayers with income up to Rs. 7 Lakh if they are opting for a new tax regime. For such taxpayers, the amount of rebate is enhanced to Rs. 25,000/-. However, no change was proposed in rebate for taxation under the old regime which remained at Rs. 5 Lakh for income & Rs. 12,500/- for tax rebate.
- As a result of present wording of section 87A, no tax is payable if the income of the person is not exceeding Rs. 5 Lakh or Rs. 7 Lakh. However, if the income of the person exceeds even marginally, say Rs. 100, no rebate becomes admissible and the tax liability becomes much more than what logically it should have been. [To illustrate, the tax liability would be Nil for income of Rs. 7 Lakh & Rs. 26,010/- income of Rs. 7,00,100/-].
- To remove the anomaly, the Finance Bill, 2023 has amended section 87A to further allow rebates to those resident individuals where income as per the new regime marginally exceeds Rs. 7 Lakh. It has been provided that where total income exceeds Rs. 7 Lakh and tax on such total income is more than amount of income exceeding Rs. 7 lacs then the tax liability will not exceed the amount of income. As a result, in the above illustration, the tax liability on income of Rs. 7,00,100/- shall be Rs. 100/- only and not Rs. 26,010/-.
- One may note that the benefit of marginal relief is available only if the taxpayer is opting for a new tax regime and not to those who are opting for the old tax regime.
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CA Naresh Jakhotia
Partner – M/s. SSRPN & Co.
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