Finance Bill 2023 passed in Lok Sabha: Capital gain from debt mutual funds to be taxed as per income tax slab

• March 25, 2023
• CA Chandan Agarwal's Office

Now capital gains from debt mutual funds will be treated as short term capital gains, bringing it at par with FDs.

The Finance Bill 2023 has got passed today in the Lok Sabha with over 45 amendments. Now capital gains from debt mutual funds will be treated as short term capital gains, bringing it at par with FDs.

Sandeep Bagla,CEO, Trust Mutual Fund, said “Last 1-2 years, MF have seen outflows from debt schemes, in spite of the tax benefit. The only segment that saw inflows was the spate of target maturity funds which were passively holding Gsecs, mimicking FDs but with tax benefits. Investors may be reluctant to redeem even after completion of 3 years now as incremental income from these investments may remain tax efficient. Few investors may remain invested wanting to defer tax as tax is payable only at redemption. Incremental inflows will come into funds who are able to manage their portfolios actively and generate inflation beating returns for investors. There is likely to be no impact in the short term but could impact the ability of mutual funds to attract debt flows in the long term.”

Tapati Ghose, Partner, Deloitte India said, “At present, capital gains arising from transfer of mutual fund units, other than equity-oriented funds which are held for more than 3 years are considered as long term and are taxed at 20% with indexation benefit. The amendment to the Finance Bill 2023 has proposed to treat gains from transfer of units of specified mutual funds as short term and tax at slab rates. This is in addition to taxation of market linked debenture proposed in the original bill. Specified mutual funds has been defined to include funds where not more than 35 % of proceeds is invested in shares of domestic companies. This may include debt mutual funds, gold ETFs etc. where investment in domestic companies is less than 35% of proceeds of the fund.

Will it impact the existing investments? “The proposed move seems to bring taxation of such mutual funds on par with bank deposits which are taxed at slab rates. While the proposed amendment shall impact transfer of the units of specified mutual funds acquired on or after 1 April 2023 while the grand fathering benefit is not available for market linked debentures. One may recall that in 2014, the government had changed the taxation of debt mutual funds (period of holding for short term gains was increased to 3 years and tax rates were increased to 20%). At that point of time, the finance minster had indicated that beneficial tax treatment or debt mutual funds allows tax arbitrage opportunity because direct investments in banks and other debt instruments attract a higher rate of tax. The proposed move seems to be a step further in this direction” said Ghose.

Source: https://www.businesstoday.in/personal-finance/news/story/finance-bill-2023-passed-in-lok-sabha-capital-gain-from-debt-mutual-funds-to-be-taxed-as-per-income-tax-slab-374717-2023-03-24