MASTERING Mutual Fund Tax Changes

A step-by-step guide to paying less tax on your earnings

- Ashish Menon,  Omkar Vasudev Bhat, Shruti Agarwal

It seems the only thing that’s certain to go up in life is taxes. And with the government hastily striking off indexation benefits on capital gains tax, that seems more of a reality than passable humour.

From April 1, 2023, the gains made on mutual funds that have less than 35 per cent allocation in Indian equity will be added to your annual income and then taxed as per your income slab. This rule effectively brings debt, international, hybrid and gold mutual funds under scrutiny.

Until now, indexation reduced the impact of inflation and lowered your tax outgo. Rightly so, because even when discussing countries’ economic growth, experts look at the inflation-adjusted GDP data as a better indicator of economic output.

But against the run of play, a sudden announcement pulled the indexation rug from underneath our feet. While, on the surface, it seems the government wants to bring tax uniformity for all asset classes, the removal of indexation has rocked investors.

Not surprisingly, many have gone into a frenzy, opening doors for dubious salespeople to create a ‘buying panic’. Many jumped headlong into ill-fitted investments just to get tax advantages before April 1. And many sought our opinion on whether they should shift their debt fund investment to FDs (fixed deposits), NPS Tier 2 or PPF (Public Provident Fund), a valid question we will tackle in the next few segments.

But before you move ahead, remember that your existing investments (bought before April 1, 2023) still enjoy indexation benefits. So, do not liquidate your existing investments.

Fixed deposits or debt funds?