Long term capital gains on investments in debt mutual funds were withdrawn

New Delhi: The long-term capital gains tax benefits currently available to debt mutual fund investors have been withdrawn. By making this unexpected sudden amendment, the government passed the Finance Bill 2023 in the Lok Sabha today without any discussion.

According to this amendment, the investment in debt funds which do not have more than 35 percent investment in equity stocks will now be subject to income tax as per that slab and the gain on that investment will be treated as short term capital gain. A similar tax is levied on bank fixed deposits.

Hitherto, investments in debt mutual funds held for more than three years were considered long-term investments and taxed at the rate of 20 per cent with indexation benefit or 10 per cent without indexation benefit.

Investors who hold the investment for less than three years are taxed as per their tax slab. At present, debt mutual fund schemes have to invest a minimum of 65 percent of their corpus in debt securities.

The amendment in the Finance Bill has been tabled in the Rajya Sabha and also applies to gold, international equity and domestic equity fund of funds (FOF). These changes will be effective from April 1, 2023 and hence, those investors who want to avail the benefits now will have to avail the benefits only till the end of the financial year 2023.

Along with this, the indexation benefit of debt mutual funds for more than three years is also likely to become history. Because if these funds do not have more than 35 percent investment in the shares of local companies, in that case they will not get any benefit of indexation from April 1, 2023 onwards.

According to Sunil Subramaniam, Managing Director of Sundaram Mutual Fund, this amendment is likely to have a major impact on debt mutual fund investors, especially HNI investors. While bank deposits will benefit. Along with this, all non-equity schemes like gold, international schemes, fund of funds etc. will also be affected.

But debt funds will be affected the most as many investors are opting to invest in debt funds to get tax relief. This sudden amendment by the government has sparked outrage on various social media platforms from people associated with many mutual funds. So many have shown the expectation that this change will also be reviewed.