Debt Mutual Fund Tax: If you prefer to invest in debt mutual funds instead of investing in investment instruments like government bonds and fixed deposits of banks, then this news is for you only. If you want to get indexation benefit in debt mutual funds, then you should invest in them by March 31, 2023. This is because from April 1, 2023, investment in debt mutual funds will be taxed as per the income tax rates. If you want to buy debt, gold or global funds and get indexation benefits on them, then complete this work before March 31.
Resolution passed in Parliament on March 24
In fact, the Finance Ministry had proposed to remove the Long Term Capital Gains (LTCG) that such mutual funds have received so far. This proposal has been approved by the Lok Sabha on Friday, March 24, through an amendment in the budget for the financial year 2023-24. Therefore, after the new rules, there will be no difference between short term and long term for debt and hybrid mutual funds. Investors who want to take advantage of indexation can take advantage by investing in debt mutual funds till March 31, 2023.
what is the new rule
From April 1, 2023, the benefit of Long Term Capital Gains Tax (LTCG) will not be available on Debt Mutual Funds and only Short Term Capital Gains (STCG) will be taxed on it. At present, LTCG is taxed at 20 per cent for taking indexation benefits in debt funds over a long period and 10 per cent without indexation. If there is a change, the tax benefits will be removed and tax will be levied according to the tax slab of the investor.
What is changing and how will be more tax
The amendments have been approved by Parliament and holders of such mutual fund schemes that invest 35 per cent of their assets in equity shares will be taxed as per their respective slabs. This simply means that after April 1, 2023, such debt mutual funds in which the mutual fund scheme’s investment in equity does not exceed 35 percent will be taxed as per the income tax rates.
Till March 31, 2023, the income tax law applies to debt mutual funds on the basis of the holding period. Any gain on sale of units after redeeming a debt mutual fund before 36 months is charged as short term capital gain. However, sale of units after holding period of more than 36 months attracts long term capital gains. Long term capital gains are taxed at 20% with indexation benefit.
what will be the effect
At present, short-term gains on investments held for less than three years are added to the income of the investor and taxed at the normal rate. If the investment period is more than 3 years, the income from this is included in long term capital gain, it is taxed at 20% after indexation. Now, no matter how long the investors keep the money in this option, its profit will be considered in the category of short term capital gain. Experts believe that when these rules are implemented, debt funds, fixed income options like FD or NSC and hybrid funds can all be the same and money can be transferred from debt instruments to other options.
What is indexation benefit
Indexation benefits are indexed to inflation during the holding period and reduce your tax. If inflation is very high, then the tax gets reduced due to indexation benefit.
However, from April 1, this system is changing and like short term gains, long term gains will also be included in the income of investors and will be taxed according to the normal slab.
What will happen to the investors
From April 1, investors on such mutual fund investments will have to pay tax on profits as per their tax slab. In such a situation, investors seeking tax benefits will suffer from this.
If the investor is in the 30% tax slab, then now he may have to pay tax up to 100% on debt mutual funds. Even if you keep the money invested in such funds for a long time, you will have to pay tax according to the rate of short term capital gains tax.
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