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benefit has also been withdrawn.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.
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.
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.
LTCG
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.
STCG
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.
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.
