Debt Funds are not Eligible for LTCG Tax Benefits from April-23

The government introduced amendments to the Finance Bill 2023. In a setback to debt mutual fund investors, a proposed amendment to the bill was removing the long-term capital gains (LTCG) tax benefit from debt mutual funds. Hence, any capital gain received on investments made after April 1, 2023 in Non-equity mutual funds (Funds which have more than 36 months investment in debt) will not be eligible for long term capital gains taxation benefits.

Find existing NRI capital gains tax on shares – long-term capital gains tax and short-term capital gains tax in India. 

Debt Funds are not Eligible for LTCG Tax Benefits
Debt Funds are not Eligible for LTCG Tax Benefits

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Finance Bill 2023 – Debt Funds not Eligible for LTCG Tax Benefits

The Finance Bill 2023 proposes that investment in mutual funds where not more than 35% is invested in equity shares of Indian companies will be treated as short-term capital gains and will be taxable at slab rates as applicable irrespective of the holding period. This change will also impact the tax treatment of international funds and gold funds. 

The changes will come into effect from April 1, 2023 onwards. Moreover, debt mutual funds held for more than 36 months will no longer be eligible for indexation benefit and 20% tax rate. The Finance Bill 2023 proposes:

  • Debt mutual funds having equal to or less than 35% invested in equity shares of an Indian company will be treated as short-term capital gain. This will be applicable to investment made on or after April 1, 2023. 
  • Debt mutual funds held for more than 3 years will no longer be eligible for indexation benefit and 20% tax rate.

Currently, debt mutual fund investors pay income tax on capital gains as per their income tax slab for a holding period of three years and more. They are taxed at the rate of 20 percent with indexation benefits or 10 percent without indexation. 

Please note all investments made before March 31,2023 will continue to enjoy LTCG and Indexation benefits. 

How does the Amendment Impact Debt Fund Investors

a) To take benefits of LTCG and indexation, any desired fixed Income Investment allocation should be filled before March 31, 2023. 

b) Existing holdings won’t be impacted. 

c) Any ongoing SIPs in International Funds / Debt Funds / Gold Fund can be stopped from April and the same can be shifted to pure Indian equity funds. 

Big Setback to Debt Fund

Experts believe that after these amendments, debt mutual funds will be treated in the same way as fixed deposits. This is a big setback for debt mutual fund investors because:

  • Indexation benefit is one of the major reasons to invest in debt, gold and international funds. 
  • Apart from indexation benefits, capital gains will be taxed at a marginal rate.
  • New amendments apply on gold and international funds as well. 
  • Institutional investors will get impacted more than HNIs. 

Radhika Gupta, Managing Director and Chief Executive Officer at Edelweiss AMC said that this will have an adverse impact on investors at large. 

“Debt funds are a big part of our portfolio. They have been able to channel significant amount of money in bond market. Bond market liquidity has been a concern in India for a long time money could migrate to fixed deposits. This will impact only the long-term investment in debt funds,” she told CNBC-TV18.

Note: This is our initial understanding based on the draft amendments circulated. We will keep you updated as more details come out.

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