Debt mutual funds are no longer more tax-efficient than bank FDs

Capital gains on investments made after 31 March in debt MFs to be taxed at investors' income tax slab rate

- Jash Kriplani & Neil Borate

Here is why investors may steer clear of debt mutual funds (MFs). Gains from investments in these funds—if held for over three years— were hitherto treated as long-term capital gains (LTCG) and taxed at 20% with indexation benefit. The funds are set to lose this taxation benefit from 1 April, as per one of the amendments in the Finance Bill, which was passed in Lok Sabha on 24 March.

The amendment dictates that investment in MFs with upto 35% equity exposure to domestic companies —essentially debt funds—will now be taxed at the investors’ income tax slab rate.

This brings the taxation treatment for debt funds on par with a bank fixed deposit (FD), where the capital gains are added to the investors income and taxed at their slab rates. Earlier, indexation benefit allowed debt fund investors to inflate their cost of acquisition over their holding period, and book less capital gains.