Prepare for Changes: Mutual Fund Tax Policy Affects Debt Funds

The Indian government’s new proposal on mutual funds could affect your debt fund investments. Read up on the latest changes and brace yourself for tax maintenance. 


In a significant move, the Indian government is introducing changes to the mutual fund rules in the Finance Bill. The proposed change will have a considerable impact on the taxation of debt mutual funds. Investors in these funds will no longer receive the long-term capital gain tax benefit and will be taxed like bank deposits. These changes are expected to be presented in Parliament today, 24 March 2023, and, if passed, will be applicable from April 1, 2023.

Current Taxation Rules on Mutual Funds

Under current mutual fund rules, debt fund investments held for more than three years qualify for long-term capital gains tax. Gains on these investments are taxed at either 20% with indexation benefits or 10% without indexation, providing investors with a significant tax advantage. 

In contrast, investments lasting less than three years are subject to short-term gains tax, and the investor must pay tax at the applicable slab rate. 

The new tax rates for the five slabs are as follows:

Total Income (Rs): Up to 3,00,000Nil
From 3,00,001 to 6,00,000 5%
From 6,00,001 to 9,00,000 10%
From 9,00,001 to 12,00,000 15%
From 12,00,001 to 15,00,000 20%
Above 15,00,00030%

Indexation is a process in which the cost of acquiring an asset is indexed (adjusted or inflated) over time in order to bring it up to current prices after inflation is taken into consideration. 

Indexation benefits allow investors to adjust the purchase price of their debt fund units for inflation, which reduces their taxable gains and lowers their tax liability.

New Mutual Fund Rules

The government’s new tax proposal on debt funds is set to create a ripple effect in the investment world. With less than or equal to 35% invested in equity shares, debt funds will now be taxed at investors’ income tax slab, resulting in a significant change in the way investors approach their portfolios. Furthermore, indexation benefits will not be available for such investments from April 1, 2023, adding a layer of complexity to the investment strategy. 

The new policy will also impact Gold, international equity, and even domestic equity fund of funds (FoFs), making high net-worth individuals the target of this proposed move. With the taxman tightening his grip on investment returns, it is crucial to stay updated and informed on the latest changes to make sound investment decisions.

Reasons for the New Rules

The government is taking steps towards creating a consistent tax policy across all debt instruments, aiming to remove tax arbitrage (trading to take advantage of differences in prices in two or more markets). The new policy proposes to apply similar taxation policies for insurance product (savings) maturity proceeds as well. 

By doing so, the government intends to simplify the taxation structure, making it easier for investors to understand and comply with the rules. This move is expected to improve the overall investment climate in the country, promoting greater participation and encouraging long-term savings.

Impact of the New Rules

  • Senior citizens may be affected the most as they can enjoy an 80TTB deduction annually on interest on Fixed Deposits but not on the gain on debt funds.
  • New, as well as younger investors who invest in debt funds for a shorter period of time in order to earn higher returns may not be affected.
  • HNIs or corporations whose investment strategy is unaffected by tax implications.
  • The expected shift from long-term debt funds to equity funds.
  • Funds may be directed towards sovereign gold bonds, bank fixed deposits, and non-convertible debentures in the debt category.

It’s time to take your portfolio to the next level with Shoonya by Finvasia! This cutting-edge platform offers selected Mutual Funds that function as cash equivalents, providing a secure place to stash your cash while you wait for the perfect investment opportunities to arise. Upgrade your trading experience and join the Shoonya community today!



Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.