Debt MFs May Get Tax Relief

Since April 1, 2023, capital gains on debt mutual funds (MFs) are taxed at the investor's income tax (I-T) slab rate, irrespective of the holding period.

Capital Labs' Das, a finance veteran, believes competition in the RBF space will intensify in 2025 as interest rates decline and venture debt players and commercial banks become more active.

"Interest rates are coming down, which will lead to more competition. Venture debt and bigger commercial banks will play a larger role, and existing players will need to offer more competitive pricing," Das noted.

While RBF platforms currently manage a smaller asset base compared to venture debt, their ability to cater to non-venture-backed startups and SMEs has made them indispensable. The model's appeal lies in its flexibility, speed, and alignment with revenue cycles, making it particularly attractive in uncertain economic climates.

As equity funding gradually recovers and interest rates ease, the dynamics of startup financing will further evolve. However, analysts said that RBF has firmly established itself as a vital alternative for growth-focused startups, cementing its role in the broader funding ecosystem.

Separately, the industry has sought alignment in holding periods while calculating LTCG for gold-based investments such as gold exchange traded funds (ETFs), gold mutual funds, sovereign gold bonds, and physical gold. Currently, gold MF and physical gold classify under LTCG on a holding period of over 24 months, and the rest on a holding period of more than 12 months.

Since April 1, 2023, capital gains on debt MFs are taxed at the investor's income tax (I-T) slab rate, irrespective of the holding period, which has resulted in increased tax liabilities for debt MF investors. Previously, LTCG on debt MF were taxed at 20% with indexation benefit or 10% sans indexation, and short-term capital gains (STCG) (holding period up to three years) were taxed at I-T slab rates. Debt funds are defined as those with 35% or less of their assets under management in domestic equities.