The central government has proposed changes in the taxation of debt mutual funds in proposed amendments to Budget 2023. As per these proposed amendments, no benefit of indexation for the calculation of long term capital gains on debt mutual funds will be available for investments made on or after April 1, 2023. However, only those debt mutual funds will lose this benefit where equity investments in such mutual funds do not exceed 35%. From April 1, 2023, these debt mutual fund schemes will be taxed at income tax rates applicable to your income. This brings taxation parity between 100% debt mutual fund schemes and bank fixed deposits.
Currently, debt-oriented mutual fund schemes have to invest a minimum of 65% of their corpus in debt securities to comply with SEBI regulations.
Currently, income tax laws allow taxation of these debt mutual fund schemes on the basis of a holding period. If the debt mutual fund scheme unit is redeemed on or before the completion of 36 months (three years), then the gains on the units are called short-term capital gains. These short-term capital gains are taxed at tax rates applicable to your income. However, if the holding period exceeds 36 months, then gains are called long-term capital gains (LTCG). These long-term capital gains are taxed at 20% with an indexation benefit.
In a nutshell, investments made in the debt mutual funds (where the equity portion of the mutual fund scheme does not exceed 35%) on or after April 1, 2023, will be taxed at income tax rates applicable to your income slab, if the proposed amendment is passed by Parliament.
Most investors prefer investing in debt mutual funds as compared to bank fixed deposits because there is a tax advantage. The interest earned on bank fixed deposits is taxed at the income tax rate applicable to your taxable income. Hence, if your taxable income is in the highest tax rate i.e., 30%, then you will pay the same on bank FD interest.
Apart from this, indexation benefit will not be available in the case of LTCG on gold and international equity mutual funds as well. Currently, LTCG is applicable on gold if the holding period exceeds 36 months. The same is the case for international equity as well.
Hence, from April 1, 2023, gains from debt mutual funds (where equity investment does not exceed 35% of the scheme portfolio), gold and international equity will be taxed the same as income from bank FD.
