Debt Mutual Funds & Taxation wef 1st April 2023:
The new debt mutual fund taxation is effective from 1st April 2023. This amendment to finance bill 2023 broadly created three categories of mutual funds for taxation.
- Mutual Funds holding more than 65% or more in Indian equity, Indian equity ETFs, or equity funds :In this category, there is no change in taxation scheme. They are taxed like equity funds. If your holding period is less than a year, then STCG is applicable and taxed at 15%. However, if your holding period is more than 1 year, then LTCG is applicable and taxed at 10% (over and above the aggregated long-term capital gain of Rs.1 Lakh).
- Mutual Funds holding less than 65% or more than 35% in Indian equity, Indian equity ETFs, or equity funds:Here also there is no change. They are taxed like debt funds (as per the old rule). If your holding period is less than three years, then the gain is taxed as STCG and the rate is as per your tax slab. However, if the holding period is more than three years, then taxed at 20% with an indexation benefit.
- Mutual Funds holding less than or equal to 35% of Indian equity, Indian equity ETFs, or equity funds:Now major changes are proposed in this category. The taxation is as per the tax slab. No question of LTCG or STCG. This taxation rule will be applicable from 1st April 2023. At present it is not clear, but it may be assumed that investments done up to 31st March 2023 are grandfathered. On plain reading of the amendment bill, it can be seen that on page number 7 the effective date of this new change is particularly mentioned. However, no mention is made wrt taxpayers who had invested earlier in these funds and whether the taxation is thus grandfathered or not. Hence, rather than speculating, let us wait for further clarity on this aspect.
- Considering all these changes, the question which comes to any prudent taxpayer’s mind here is whether it is still worthy considering debt mutual funds for future investments?
- Answer Looks to be negative it may happen that, few funds may change the mandate by increasing the exposure of arbitrage opportunity for more than 35% to be eligible for debt mutual fund indexation. To what extent such a change in mandate will impact fund performance is still unknown. However, if one looks for a long-term tax advantage, then this option may surely be exercised.
Further, some of the Debt Mutual fund taxation impacts maybe;
✓Mutual fund debt AUM could slow down.
✓NBFCs will be the biggest losers(cost of funds will go up).
✓Bank deposits the biggest gainers.
✓Government makes more taxes.
✓Bank deposits growth (currently struggling with CASA) will further see an uptick.