The development is a big blow to people who plan to invest in debt mutual funds that became popular due to long-term tax benefits. With this, the popularity of debt mutual funds in India is also likely to fall.
By India Today Business DeskA proposal to remove long-term tax benefits on debt mutual fund investments was passed in parliament as part of amendments to the finance bill on Friday.
The development is a big blow to people who plan to invest in debt mutual funds that became popular due to long-term tax benefits. With this, the popularity of debt mutual funds in India is also likely to fall.
The decision could help bank deposits grow, which have been struggling to keep pace with the demand for credit over the past 12 months, leading to higher funding costs for lenders.
Mutual funds with less than 35 per cent invested in equities are proposed to be treated as short-term, which could lead to the removal of indexation benefits that are crucial for reducing the tax liability for such funds.
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Following this, the tax rate applicable would be based on the income tax slab on which the investor falls.
According to experts, the proposal will ensure that debt mutual funds are taxed at par with other investments.
The mutual fund industry may request the finance ministry to revisit the decision, according to two mutual fund executives who spoke to news agency Reuters.
Industry data indicates that assets under management for debt-oriented products stood at over Rs 12 lakh crore as of December 31, 2022.
As of now, investors in debt funds pay income tax on capital gains as per their income tax slab for a holding period of three years. After this, these funds pay either 20 per cent with indexation benefits or 10 per cent without indexation.
The new tax rules for debt mutual funds would apply to investments made on or after April 1, 2023 and impact inflows into these funds.
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As the investments in debt mutual funds will be taxed as short-term gains, it would discourage high net worth individuals who were using this investment as a tax-saving instrument.
Keven Bayer
Kayleigh Rogahn
Wilmer Bode