The taxation of debt mutual funds will change from 1st April 2023.
Here is how your debt fund capital gains will be taxed from 1st April 2023:
If the Mutual Fund holds less than or equal to 35% of Indian equities, Indian equity ETFs or equity funds, then the taxation of capital gains will be as per your tax slab irrespective of your holding period. So there is…
No differentiation between LTCG and STCG in debt funds now. Your debt fund capital gains will be taxed as per your income tax slab rates at all times.
This rule will be applicable from 1st April 2023.
Till now (or up to 31st March 2023), the gains in Debt Funds held for less than 3 years (or 36 months) were treated as Short Term Capital Gains (STCG) and taxed as per the investor’s income tax slab rate. The Long Term Capital Gains (LTCG) were on investments held for more than 3 years (or 36 months) and taxed at 20% with indexation. This indexation benefit of debt funds was what made them a good FD alternative till now.
This surprising change, which is a negative for debt fund investors has been announced by the government in amendments to Finance Bill 2023.
This move is expected to give a big boost to bank fixed deposits as this takes away the tax advantage that debt funds had over bank FDs. While it is too early to say how it will impact the demand for debt funds, I think AMCs will soon look at changing the mandates of a few of their debt funds to increase equity exposure via the arbitrage route to once again make them eligible for old debt fund indexation taxation.
So that is how Debt Mutual fund taxation will be from 1st April 2023 in India.
While given the current rate environment, the debt fund returns are expected to increase in near future, it is also true that this tax change for debt funds was unexpected and out of the blue. But this is something that needs to be taken in stride and moved on. But still, in my view, DON’T be in a hurry to make any big changes in your debt fund portfolio. The change will become effective from 1st April 2023. So wait and watch how AMCs take this news into account and make changes to the debt fund structure and their offerings.
Thank you for the article and website. Very Informative.
Question: What about existing debt fund investments made prior to 31-Mar-2023.
If redeemed post 01-Apr-2023; will they be subject to new tax rule or still be applicable for 20% indexation benefit?
Hi
‘No differentiation between LTCG and STCG in debt funds now. Your debt fund capital gains will be taxed as per your income tax slab rates at all times.’
My query is whether gains in debt funds invested post April 2023 cant be set off against any loss?
For instance in current FY, i incurred loss on sale of House Property (which will be carried forward for 8 years). Can the capital gains in Debt Mutual funds be set off against that