While the recent change in tax rules governing debt mutual funds are attracting a lot of debate and appear like a setback, we would like to dwell upon some points which hint that the excitement may be temporary. The resilience and inventiveness of the Industry should stand it in good stead to be able to overcome this challenge.
How does Debt funds losing indexation benefit impact us:
For a long time, debt mutual funds enjoyed preferential tax treatment, which gave them an edge over bank fixed deposits (FDs). An amendment to the Finance Bill 2023, however, took away their advantage and brought their tax treatment on a par with that of bank FDs and bonds.
Until March 31, if you had held units of a debt fund for more than three years, you would have been taxed at the rate of 20 per cent with indexation. Depending on the inflation rate during the period that you held the fund units, indexation brought the effective tax rate down to around 10 per cent. Interest income from bank FDs, on the other hand, is taxed at the investor’s income tax slab rate.
Does this mean that you should not look at debt mutual funds as an investment vehicle at all in the future? Not quite.
Shorter-duration debt funds such as overnight, liquid, ultra short duration, low duration, and money market products were anyway held by investors for less than three years and hence were taxed at the investor’s slab rate. The change in tax rule is therefore likely to have a minimal impact on these funds. Rising yield to maturity (YTM) of their portfolios have enhanced the attractiveness of these funds. You can even now choose a category whose portfolio duration matches your investment horizon and continue to invest in it.
This story is from the April 2023 edition of Investors India.
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This story is from the April 2023 edition of Investors India.
Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 9,000+ magazines and newspapers.
Already a subscriber? Sign In
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