Amendment in Debt Mutual Fund Taxation w.e.f. 01.04.2023

Introduction:

In the Finance Bill 2023, 64 amendments were passed in the Lok Sabha and one of the major amendments was passed relating to change in Capital Gain Tax on Debt Mutual Funds. This amendment came as a shock to the Mutual Fund industry, High net worth investors and many big fund houses have criticised such unexpected change at the time of passing the Finance Bill 2023. In a major change of taxation of specified Debt Mutual funds, with effect from 1st April 2023, indexation benefits on sale of such Specified Debt Mutual Funds have been abolished. And hence, tax will be levied on redemption of these mutual funds at a slab rate irrespective of their holding period. Consequently, all Long Term Specified Debt Mutual Funds will be considered as short term and to be taxed at slab rate/marginal rate w.e.f. 01.04.2023. If the investor is coming in a highest tax bracket, he will be ending up paying 30% tax on the gains arising on sale of such specified debt funds. This will take certain Debt Mutual Funds at par with the Fixed Deposits.

 It is to be noted that investment made up to March 31, 2023 will still be eligible for the indexation benefits.

On Which Mutual Funds, the above indexation benefit is withdrawn w.e.f. 01-04-2023?

Only those Mutual Funds in which not more than 35% has been invested in Equity shares of a domestic company will be affected and capital gains arise on the transfer of the same will be deemed to be a short term capital gain with the above amendment. For the other mutual funds not covered here, will still be taxed at applicable rates without any change.

Existing Taxation Benefits on Long term Capital Gain on redemption of Debt Mutual Fund:

If the investment of specified debt mutual funds having holding period exceeding 36 months are sold, then such capital gain is regarded as a long term capital gain (LTCG). The long-term capital gain is currently taxed at 20% with indexation cost benefits.

Proposed Taxation capital gain of debt mutual fund:

In the proposed amendment, the capital gain will be deemed as a short term capital gain (STCG) even if the investment of debt mutual fund holding period exceeds 36 months. And Tax thereon will be calculated as per the slab rate.

Example:

For Example, Mr. A has invested in specified debt mutual funds for Rs. 200000/- on 01-05-2011 and he sells the same on 28-03-2023 then the tax calculation for FY 2022-23 will be as follow:

Index No

• 2011-12- 184

• 2022-23- 331

Impact:

Due to the above stated changes, investors now owe more in taxes, which makes specified debt mutual funds less appealing as an investment vehicle. With the above example of Existing and Proposed capital gain tax calculation, the incremental tax out go will be of Rs. 85,957 (1,62,000 – 76,043) in FY 2023-24. So, for an individual person, tax liability will be increased significantly if he/she acquires and sells such specified debt mutual funds in the coming FY 2023-24. The funds will be starting moving from certain debt mutual funds to Fixed Deposits, NCDs, SGBs as a result.

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