How Debt Mutual Fund Investors Could be Impacted by Upcoming Tax Amendments

The current taxation policy for investors in debt mutual funds imposes income tax on capital gains for a holding period of three years based on their respective tax slabs. However, those holding investments for more than three years are taxed at a rate of 20% with indexation benefits or 10% without indexation.

Proposed amendments to the Finance Bill by the Finance Ministry suggest that the long-term capital gain tax benefit that debt mutual fund investors currently enjoy may be done away with. The proposed changes state that debt funds with no more than 35% invested in equity shares will be treated as short-term capital gains and taxed at the income tax slab level. Similarly, bank fixed deposits will also be taxed as such.

The proposed amendments, which are expected to be part of the finance bill amendments that may be presented in parliament on Friday, will also apply to gold, international equity, and even domestic equity fund of funds (FoFs). If approved, these changes will be effective from April 1, 2023. Therefore, investors who wish to take advantage of the proposed changes can do so before the end of the year.