Saurav Basu, Head, Wealth Management

“The government has introduced amendments to Finance Bill 2023 that investments in mutual funds where not more than 35% is invested in equity shares of Indian companies i.e. debt funds will now be deemed to be short-term capital gains w.e.f. April 01, 2023.

That is, capital gains from debt funds, international funds, gold funds, hybrid funds (upto 35% equity) and even domestic equity funds of funds (FoFs) irrespective of their holding period, will be taxed at an individual’s relevant tax slab. From April 1, 2023, these debt mutual fund schemes will be taxed as per individual’s income tax slab.

Earlier interest on bank deposits was taxed at individual tax rate and debt MFs enjoyed LTCG of 20% with indexation if held more than three years.

The proposal will bring bank fixed deposits (FDs) on par with debt MFs. This move will likely give a boost to bank FDs & bonds and will do away with the arbitrage between different debt instruments. The industry may also see shift of money from long term debt funds to equity oriented funds due to taxation benefit. The change will not affect Corporates or HNIs who invested in debt MFs for shorter period (less than 3 years).

All existing investments and new investments made before 31 March will not be affected by this proposed tax change. The aforesaid proposal is subject to enactment after approval of both the houses of Parliament (at present Lok Sabha has passed the bill) and assent of the President of India.”