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Business News/ Money / Personal Finance/  Should you buy debt mutual funds before March 31 to get indexation benefits? Experts list out their views

Should you buy debt mutual funds before March 31 to get indexation benefits? Experts list out their views

The tax benefits for long-term debt mutual funds were eliminated by the government as of 1st April 2023 by an amendment to the Finance Bill.

Investors who invest in debt mutual funds before March 31 will thus be able to get the indexation benefit. (Photo: iStock)Premium
Investors who invest in debt mutual funds before March 31 will thus be able to get the indexation benefit. (Photo: iStock)

The tax benefits for long-term debt mutual funds were eliminated by the government as of 1st April 2023 by an amendment to the Finance Bill. Long-term capital gains on debt mutual funds will now be taxed at the investor's tax slab rates, rather than the previous 20% with indexation benefit and 10% without that as a result, if the investor is subject to the highest tax bracket, this rate would be 35.8%. (including surcharge and cess). Investors who invest in debt mutual funds before March 31 will thus be able to get the indexation benefit. As a result, let's take opinions from our different industry experts on whether investors should invest in debt mutual funds March 31, 2023 to be eligible for indexation benefit.

CA Arpit Jain, Joint MD, Arihant Capital 

Following the recent amendment to the Finance Bill 2023, long-term capital gains from debt, gold, and foreign equity mutual funds will cease to enjoy the indexation facility. This taxation will be effective from 1st April 2023.

The good news is, you still have a small window of opportunity to avail of the indexation benefit, if you invest in these funds before 31st March 2023 until they are sold. So if you are planning to invest in debt funds (or gold or international funds) then it will be a smart idea to do it before 31st March 2023. This way you can avail of the indexation benefit, whenever you sell them, and safeguard your investment from inflation.

Ajay Gupta , CBO- Trust MF

Existing investments are grandfathered and retain their old tax benefits. New investments done till 31st March 2023 also retains benefits. Hence investors who were waiting for more clarity on FED/RBI or looking to invest in a staggered way should lock in funds at prevailing attractive yields before March 31 and get indexation benefits.

Marzban Irani, Chief Investment Officer – Fixed Income, LIC Mutual Fund

Indexation benefit accounts for inflation and allows one to inflate prices by using government notified inflation factor called “Cost Inflation Index". Post that, capital gains are taxed at 20% + Surcharge. This benefit may provide reduction in tax outgo for investors, hence investors having an investment horizon of more than 3 years may take this indexation benefit advantage and invest in debt mutual funds before 31-Mar-23.

Gautam Kalia, SVP and Head Super Investor at Sharekhan by BNP Paribas

The debt mutual funds have indexation benefits which reduce the tax liabilities and the new investment from 1st of April will not have these indexation benefits. Currently, the yields are at attractive levels and investors should take advantage of good yields and indexation benefits.

Sujit Bangar, Founder,

The recent changes brought by finance bill have really harmed the major tax benefit of debt mutual funds. That is benefit of indexation and special tax rate of 20% for debt mutual funds. 

We always invest in debt mutual funds based on our goals mapped to short term period. Taxation benefit is always there but it’s not core reason for which we invest. Therefore, if we are already invested in any debt scheme, it’s better to stay away from premature redemption just in response to this new happening. Our investments are mapped to our goals and should remain so. Taxation impact shall be secondary. 

Secondly, situation is different when we are thinking of fresh investing in debt mutual funds. If one is intending to allocate some funds for debt portions, it’s best to do so before 31st March and keep getting taxation benefit. While doing so , if you wish to add 5 to 10% extra to these portion, it’s fine to do so. 

In the nutshell, we should avoid herd behaviour and extreme action of panic redemption. Rather we can be proactive in fresh investment in debt schemes and even fine if we increase some allocation before 31st March. 

Gaurav Rastogi, CEO& founder,

With the tax arbitrage over FDs gone, the lower after tax returns on debt funds will make investors reassess FDs again. The small spread that debt funds will still give over FD is currently not worth the interest rate and credit risk the investors are taking. A 60% equity + 40% debt investor may now look at a 65% equity + 35% FD portfolio for similar after tax returns and better down side protection. 

Over time I expect corporates cost of borrowing to go up so that a higher debt fund yield spread over FD can be offered again. This is not a death knell for debt markets, it is just a resetting of corporate cost of debt which was unnaturally low due to tax breaks.

Suresh Surana, Founder, RSM India

Since Section 50AA is a deeming fiction wherein the capital gains on redemption of the aforementioned dent mutual funds are deemed to be short term in nature, no indexation benefit can be claimed with regards to such funds. 

Moreover, it can be inferred that the taxpayers would be able to avail the indexation benefit by way of purchasing such funds before March 31 as the indexation benefit is availed at the time of sale/ redemption and it is held for a period of more than 36 months. 

As such, the benefit of indexation would be available if purchases is made on or before 31 March 2023, though other factors such as investment goals or objectives, alternate investment options, returns, etc needs to be considered before investing.  

Anand K Rathi, Co-founder of Mira Money

Make hay while the sun shines. One should buy debt mutual funds before 1 st  April, but certain conditions exist.

The investment should be held for a period of 3 years at least. If you break before three years, no indexation is available.

There should be a careful analysis of the funds you invest in. At least one should match the fund holding period with your holding period.

The fund’s portfolio should be carefully researched. In a bid to invest fast, do not fall for higher yields and portfolios that have lower-quality papers.

If possible, lock in current higher yields for the longer term but remember, if the yields move up, there will be some short-term marked-to-market losses.

Stick to asset allocation. Don’t go overboard on debt. This may affect overall portfolio growth.

Parry Singh, Founder & CEO, Red Fort Capital

Investing in debt mutual funds before March 31 can be beneficial if you want to take advantage of indexation benefits for taxation purposes. Debt mutual funds held for more than 3 years qualify for long-term capital gains tax, which allows you to apply indexation to your gains. Indexation adjusts the cost of your investment to account for inflation, effectively reducing your capital gains and the tax liability on them. By investing before March 31, you can potentially lower your tax burden in the future.

However, tax considerations should not be the sole reason for investing in debt mutual funds. It's essential to assess your risk appetite, investment horizon, and overall financial goals before making any investment decision.

Arvinder Singh Nanda, Senior Vice President, Master Capital Services Ltd.

The government has made changes in the taxation of debt mutual funds while passing the Finance Bill, 2023 in Lok Sabha.  The government has scrapped the long-term capital gains treatment (with indexation benefits) for income from debt mutual funds and other schemes that invest up to 35% in equity shares of domestic companies. This move is expected to impact fixed-income-oriented mutual fund houses, as inflows may moderate due to reduced attractiveness.

The new debt mutual fund taxation is effective from 1st April 2023. The existing investments in debt-oriented mutual funds made before March 31, 2023, shall not be impacted by the aforesaid change in tax rule. 

Till March 31, 2023, income tax laws allow taxation of these debt mutual fund schemes on the basis of a holding period. This is a good time to accumulate tax-efficient debt funds in the portfolio. Investors who want to take advantage of the proposed changes can do so before year-end.

Himani Chaudhary, finance creator

Investments made in debt mutual funds before April 1, 2023 will continue to enjoy the benefit of indexation. This means that the investment amount will be adjusted on an inflation basis, which improves the post-tax returns for debt mutual funds. However, after April 1, 2023, those debt mutual funds will lose this benefit where equity investments in mutual funds do not exceed 35%. This makes the taxation policy equivalent between debt mutual fund schemes and bank fixed deposits. 

If an investor falls in the 30% tax bracket and invests in debt instruments through mutual funds to take advantage of the tax arbitrage, they will be impacted the most by this amendment. For these individuals, it may be beneficial to invest in debt mutual funds before 1st April, 2023, to avail of the benefit of indexation. On the other hand, individuals who fall in a lower tax bracket may not see much difference in the tax treatment of debt mutual funds and FDs. 

And it may be more important to consider other factors such as the investment tenor, risk appetite, and expected return before deciding whether to invest in Debt mutual funds or FDs. For regular HNI investors in debt mutual funds, target maturity funds can be locked in. Since interest rates will fall in future after the recent peaks, it may be more profitable than FD in the longer term.

Khazana Associates founder Santosh Badhei

To lock in the indexation benefit, money will flow into debt mutual funds as the spread between the fixed deposit rate and debt mutual fund yield to maturity is significant. Mutual funds track live data and prices, providing a superior understanding of market movements compared to fixed deposits, which are primarily priced by banks. 

Therefore, high net worth individuals (HNIs) will likely invest in debt mutual funds before 31st March to take advantage of the indexation benefit and interest rate spread. On the other hand, retail investors are expected to move towards banks.

Edul Patel, Co-founder and CEO at Mudrex

Currently, debt mutual funds held for over 3 years are considered long-term investments and taxed at 20% with indexation. If the investor chooses not to avail of the indexation benefit, the long-term capital gains tax rate is 10%. Investments held for less than 3 years are taxed based on the investor's tax slab. 

However, the Finance Bill 2023 includes an amendment that will reclassify capital gains from debt mutual funds as short-term capital gains, eliminating long-term capital gains. Furthermore, debt mutual funds held for over 3 years will no longer qualify for indexation benefits and any gains will be taxed as capital gains tax. 

These amendments aim to bring debt mutual funds on par with Fixed Deposits (FDs), which currently lack tax advantages compared to debt mutual funds. Therefore, purchasing debt mutual funds before March 31st may be advantageous since the new taxation rules will come into effect on or after April 1st, 2023.

Rahul Jain, President and Head, Nuvama Wealth

While the indexation benefit significantly impacts the after-tax returns of debt funds, investors should adhere to the asset allocation strategy. In other words, if there is room in the portfolio, invest in debt funds. Avoid investing in debt funds because the indexation benefit will be unavailable from 1st April. The 31st March deadline should be used, at best, to expedite the pending investment decision.

Neha Juneja, CEO,

You will enjoy indexation benefit on your debt mutual fund investment if you execute the investment before March 31 and hold it for at least 3 years.  However, investing just for the sake of tax arbitrage is not advisable.  Investors must understand that debt mutual funds are not risk-free and subject to market volatility and interest rate risk, the consequences of the latter have been rather evident lately. Like any other investment, your debt mutual fund investment should also go through standard diligence and match your investment goals, risk tolerance, assessment of the fund manager's capabilities and track record.

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Vipul Das
Vipul Das is a Digital Business Content Producer at Livemint. He previously worked for (OneIndia News) and has over 5 years of expertise in the finance and business sector. Stocks, mutual funds, personal finance, tax, and banking are among his specialties, and he is a professional in industry research and business reporting. He received his bachelor's degree from Dr. CV Raman University and also have completed Diploma in Journalism and Mass Communication (DJMC).
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Published: 28 Mar 2023, 09:30 PM IST
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