New tax rules for Debt mutual funds announced


The government has passed amendments to the Finance Bill, 2023.

One of them was scrapping the long-term capital gains (LTCG) tax benefit from debt mutual funds.

Gains from debt mutual funds investing less than 35% in domestic equity would be taxed as short term capital gains tax and will be added to the income tax slab.

The indexation benefit has also been withdrawn.

Therefore they would be treated in the same manner as bank fixed deposits.

The new rule will come into effect from 1st April 2023.

The new set of rules would be applicable to various debt, international and gold mutual fund schemes.

best mutual funds

How are mutual funds taxed?

Mutual funds are taxed based on the asset classes they invest in.

There is one set of rules for equity mutual funds and another for debt mutual funds.

For the purpose of taxation, international mutual funds are considered as debt mutual funds.


Additional reading: Click Here to read about mutual fund mistakes you should avoid making

How are Debt mutual funds taxed presently?

Debt mutual funds invest in government securities, debentures, corporate bonds, etc. unlike equity mutual funds which invests primarily in equity and equity related instruments.

They provide lower returns than equity mutual funds but more safety.

They are less volatile than equity mutual funds and are more suited for short term goals.




For debt mutual funds, long term capital gains tax is applied on gains from debt mutual funds held for more than 36 months.

The LTCG rate for debt mutual funds is 20% after indexation.



For debt mutual funds, short term capital gains tax is applied on gains from debt mutual funds held for less than 36 months.

Short term capital gains are added to your income and taxed as per your income tax slab.


Taxes on International mutual funds

International mutual funds are taxed as debt mutual funds.

The taxation rules applicable on debt mutual funds are applicable on international mutual funds too.

It is the same for all international mutual funds irrespective of the geography.

Meaning a US based international mutual fund will be taxed in the same manner as a European, emerging markets or Asia based.


Are you investing in the right mutual funds?


What is Indexation?

Indexation is a procedure by which the purchase price of an asset is adjusted according to inflation.

Therefore, indexation increases the purchase price of an asset.

This reduces the overall gains and in turn the taxes to be paid as well.

Indexation allows you to adjust the price with respect to the Cost Inflation Index (CII), indexation takes into account inflation.

The Cost Inflation Index (CII) is updated annually by the Government of India.


To put it simply

Presently debt mutual funds held for more than 36 months would attract a LTCG tax of 20%.

The indexation benefit was added to it due to which the cost price would go up which in turn would bring down profit.

Lower profit would mean lower LTCG tax.

This will not be the case for investments made in debt mutual funds from 1st April 2023 onwards.

Going forward there will be no dual benefits of LTCG tax & indexation and instead all gains will be added to your income and will be taxed as per your income tax slab.

This will be applicable for all funds investing less than 35% in domestic stocks, therefore this rule be applicable to international and gold funds too along with debt funds since they would be treated at par.



 For portfolio enquiriesemail us with your doubts at

Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing

Copyright © 2023  The Mutual Fund Guide, All rights reserved

My Instagram