BackFor mutual fund investors, what debt funds taxation changes mean
The Finance Bill 2023 with 64 official amendments, including the one that seeks withdrawal of long-term tax benefits on certain categories of debt mutual funds, was passed today
PremiumDebt mutual funds will be stripped off the long-term tax benefit if they invest less than 35 per cent of their assets in equities. Such mutual funds will attract short term capital gains tax. The government has made a proposal in the form of an amendment to the Finance Bill 2023 in the Parliament, which was passed in the Lok Sabha on Friday with 64 official amendments.
According to personal finance experts, such proposals will bring bank fixed deposits (FDs) on-par with debt mutual funds.
Tax and investment expert Balwant Jain
The amendment to finance bill 2023 related to debt mutual fund has unintendedly created three categories of mutual funds for taxation.
1) Equity oriented scheme having minimum 65% equity.
2) Schemes having not more than 35% equity to be taxed as short term capital gains.
3) Mutual funds having more than 35% but less than 65% equity, eligible for indexation and to be taxed at 20%.
Anand Dalmia, Co founder & CBO of Fisdom, a wealthtech platform
The recent change in tax regulations has created a level playing field for financial products such as bank fixed deposits, debt mutual funds, and insurance savings products. This move is expected to impact fixed income-oriented mutual fund houses, as inflows may moderate due to reduced attractiveness. However, liquid and institutional flows may not be as affected.
This new level playing field may offer some hope for life insurers, particularly in light of the post-budget gloom. Additionally, investors may shift some debt allocations towards bank fixed deposits, which could result in some incremental interest for banks. However, given the size of bank fixed deposits, the non-liquid and non-institutional assets in debt mutual funds, and the limited tactical play offered by bank fixed deposits, this shift may not have a significant impact on bank fixed deposits' size.
When considering the overall perspective, it's important to note that debt mutual funds have been an effective way to increase retail participation in India's nascent debt ecosystem. Therefore, the new regulations may impede the development of India's debt capital market and reduce corporate dependency on it for fundraising aspirations.
Bhavik Thakkar, CEO-Abans Investment Managers
Usually, government makes changes in budget proposals post receipt of feedback/suggestions before the budget gets passed by parliament. The current session of parliament is expected to pass budget on Friday, 24th March 2023.
Government introduced a new amendment in budget to treat any capital gain from Mutual Fund (having 100% debt securities like all debt fund or hybrid fund upto 35% equity) as Short Term Capital Gain which gets taxed as per investor’s slab rate. This would mean that for debt and hybrid MF, there will be practically no difference between short term and long term.
Taxation for Debt MF, Fixed Deposit and Market Linked Debentures (MLD) will be at par now.
Radhika Gupta - Managing Director & Chief Executive Officer, Edelweiss Asset Management Limited
I hope the proposed change in the Finance Bill to remove LTCG with indexation status on debt funds is reviewed. Financialization is just happening in India and a vibrant corporate bond market needs a strong debt MF ecosystem."
Currently, such mutual fund schemes attract 20 per cent LTCG with indexation benefits.
Siddharth Maurya, Resource Specialist, Expertise Real-Estate and Fund Management
According to the Finance Bill proposed by the government, investments made in mutual funds where the equity shares of Indian companies comprise no more than 35 percent will be considered as short-term capital gains. This change will be effective for investments made on or after April 1, 2023. Furthermore, the indexation benefit will be removed for debt funds held for more than three years, and they will no longer be eligible for a 20 percent tax rate.
The indexation advantage was one of the key factors motivating investments in debt, gold, and international funds. Retail investors tend to have a smaller presence in the fixed income category, including target maturity funds. Consequently, high net worth individuals and international clients are likely to be more affected by the changes.
Debt funds constitute a significant portion of our portfolio, and they have effectively directed a substantial amount of money into the bond market. However, the liquidity of the bond market in India has been a persistent issue, which could potentially cause investors to shift their funds towards fixed deposits. The impact of this shift would primarily be felt by long-term investments in debt funds.
From a taxation standpoint, life insurance products are superior to debt mutual funds for annual investments up to ₹5 lakh. However, for annual investments exceeding ₹5 lakh, life insurance and debt mutual funds are now comparable, which is an improvement from the situation after the FY24 budget.
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