Govt To Remove Long-Term Tax Benefit For Debt Mutual Fund Investors, To Be Taxed As FDs: Report

Debt mutual funds' post-tax returns are higher than bank FDs' post-tax returns. However, after the new amendment, this will change

The Finance Bill 2023, contains tax proposals for the fiscal year that will be effective from April 1. The Bill is going to be taken up for approval in the Lok Sabha as early as Friday

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The Ministry of Finance has introduced an amendment in the Finance Bill 2023 that will classify income from debt mutual funds as a short-term capital gain. The move implies that gains from debt mutual funds will be taxed at your income tax slab rate and added to your taxable income. A source told the news agency PTI, the government is likely to make such a proposal in the form of an amendment to the Finance Bill 2023 in the Parliament. 

The proposed amendment, as reported by Business Today (BT) says, “Specified mutual fund means a mutual fund by whatever name called where not more than 35 per cent of its total proceeds is invested in equity shares of the domestic companies.”

The Finance Bill 2023, contains tax proposals for the fiscal year that will be effective from April 1. The Bill is going to be taken up for approval in the Lok Sabha as early as Friday.

The BT report says that the move will erase the advantages of mutual funds over fixed deposits. As of now, debt mutual funds are treated as long-term investments if held for more than 3 years. Long-term capital gains are taxed at 20 power cent with indexation benefits or 10 per cent without indexation.

As a result, debt mutual funds' post-tax returns are higher than bank FDs' post-tax returns. However, after the new amendment, this will change. Since the returns of bank FDs and debt funds are often similar, the tax advantage of debt MFs proved to be a key attraction for investors in the higher tax slabs.

The amendment has also proposed to remove long-term capital gain taxation for gold ETFs and international funds, which have the same tax structure as debt schemes at present.

Radhika Gupta - Managing Director & Chief Executive Officer, Edelweiss Asset Management Limited in a tweet said, “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.”

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. 1/2

— Radhika Gupta (@iRadhikaGupta) March 23, 2023

Another major announcement in Budget 2023 is the proposal to tax as a short-term capital gain. Market Linked Debentures are non-convertible debentures where the return is not fixed but depends upon the performance of the underlying index.

How Mutual Fund Markets Reacted

According to a report by Bussian Standard, asset management companies (AMCs) witnessed sell-off pressure in early trade. At 9.15 AM, HDFC AMC was trading down 4 per cent, UTI AMC and Aditya Birla Sun Life AMC were down almost 2 per cent. Nippon AMC was trading 1 per cent lower.

Nangia Andersen LLP Partner Vishwas Panjiar told PTI the Finance Bill 2023 introduced special provisions for computing capital gains in case of transfer of a market-linked debenture. This provision is now expanded to cover specified mutual funds as well i.e. mutual funds where not more than 35 per cent of proceeds are invested in equity shares of domestic companies.

"Accordingly, in all cases, irrespective of the period for which the market-linked debenture and/or the specified mutual fund is held by the holder, gains arising from the transfer will be deemed to be short-term capital gains," Panjiar said.