Impact of New Finance Bill on Debt Mutual Funds Taxation
When Finance Bill 2023 will be passed?
The Lok Sabha on Friday, March 24, passed the Finance Bill, 2023 with some amendments.
Purpose of Finance Bill:
Finance Bill is a Money Bill, the government seeks to levy new taxes, make alterations in the current tax structure, or make proposals for the continuance of the present tax structure for a certain period beyond what was originally approved by the Parliament. The Parliament approves this bill for one fiscal year.
Changes to the Debt Mutual Funds Taxation as per the Finance Bill | Debt Mutual Funds Taxation from 1st April 2023
Debt mutual funds in India have been a popular investment option for retail investors seeking stable returns from fixed income securities. However, from 1st April 2023, the taxation benefit that these funds enjoyed as long-term capital gains (LTCG) will no longer be applicable. This change in tax regulations will have significant implications for investors who will now be taxed at their slab rates without any indexation benefit. This is as per the new proposal by FM Sitharaman
.
Previously, debt mutual funds enjoyed a taxation benefit of LTCG, where gains made on investments held for more than three years were taxed at 20% with indexation benefit. This taxation benefit made debt mutual funds an attractive investment option for many investors. However, the government’s recent decision to eliminate the LTCG tax benefit for debt mutual funds and bring their taxation treatment on par with bank fixed deposits will impact investors significantly.
The new tax regulations will now apply to all investors, regardless of their holding period in a debt mutual fund. This means that irrespective of the holding period, investors will be taxed as per their slab rate. For investors falling under the highest income tax slab rate of 30%, they will have to pay 35.8% (including surcharge and cess) on their gains without any indexation benefit.
In addition to the changes in tax regulations, the government has also proposed an amendment to the Finance Bill 2023. According to this proposal, debt mutual funds that invest less than 35% of their assets in equities will lose their long-term tax benefit and will be taxed as short-term capital gains. On the other hand, mutual funds that invest more than 35% but less than 65% in equities will be eligible for indexation and taxed at 20%.
Impact on Investor Behavior:
These changes in tax regulations will bring bank fixed deposits on par with debt mutual funds, as both will be taxed similarly. This move is expected to impact fixed-income oriented mutual fund houses, as inflows may reduce due to reduced attractiveness. Additionally, investors may shift some debt allocations towards bank fixed deposits, which are now a more attractive option from a taxation standpoint.
Relief for old investments:
However, there is still some relief for investors who have invested in debt mutual funds before 1st April 2023. They can continue to enjoy the LTCG tax rate of 20% with indexation benefit after three years. But, investors with systematic investment plans (SIPs) in debt mutual funds must note that units bought after 1st April 2023 will be subject to the new tax treatment, where capital gains arising from the sale of these units will be taxed at their income tax slab.
In conclusion, the new tax regulations will have far-reaching implications for investors and the mutual fund industry in India. While the government’s intention to bring parity between debt mutual funds and bank fixed deposits is understandable, it remains to be seen how these changes will impact the development of India’s debt capital market and corporate fundraising aspirations.
#debtfunds #indexation #financebill #FMSitharaman