Long-term capital gains in debt mutual funds set to go

KEY CHANGES TO TAX PROPOSALS IN FINANCE BILL

- PRASANTA SAHU & SURABHI

• New tax on InvITs to be on a lower base

IN A MOVE that could take away the long-term capital gains benefits for a majority of debt mutual fund schemes, one of the key amendments that the government is set to propose in the Finance Bill 2023, is that the taxation of capital gains of investors in debt funds which have 35% or less of their assets under management in domestic equities will be at the slab level, said sources close to the development. Currently, investors in debt funds pay income tax on capital gains according to their income tax slab for a holding period of three years and after that, they are taxed at the rate of 20% with indexation benefits or 10% without indexation.

According to mutual fund heads, this proposal is likely to give a boost to bank fixed deposits and also pure equity funds and do away with the arbitrage between different debt instruments. Amit Maheshwari, tax partner, AKM Global said, "The proposal would take away the tax advantage for such funds and the investors may resort to alternate options such as fixed deposits." The objective is to plug a tax loophole used by high-net-worth individuals and family offices for investments.

In other key changes in the tax proposals in the Finance Bill 2023, before it is put to vote in Lok Sabha, sources said that the proposed income tax at slab rate on amortisation of debt in the hands of InvITS/REITs unitholders will be restricted to the excess sum received by them over the issue price, that is, the initial investment. Redemption of the units won't be a requirement for computing the gains, post the cost of acquisition.