Finance Bill 2023 Amendment: Debt funds are suggested to be taxed at the same rate as FDs

Presently, one of the most compelling reasons to invest in debt funds is the tax benefit they provide over fixed deposits. Finance Bill 2023 Amendment: Debt funds are suggested to be taxed at the same rate as FDs.

The Finance Bill 2023 includes an unexpected modification that classifies capital gains from debt mutual funds as merely short-term capital gains. Gains from debt mutual funds will be added to your taxable income and taxed at your marginal tax rate.

Presently, one of the most compelling reasons to invest in debt funds is the tax benefit they provide over fixed deposits. If a debt fund is kept for more than three years, the investor pays 20% long-term capital gains tax with an indexation benefit, but interest on a fixed deposit is taxed according to one’s tax bracket. As a result, the post-tax returns on debt mutual funds are larger than those on bank FDs. Short-term capital gains from debt funds, on the other hand, are currently taxed at the individual tax bracket if redeemed within three years.

“I hope the proposed Finance Bill change to abolish LTCG with indexation status for debt funds is reconsidered.” Financialization is only beginning in India, and a healthy corporate bond market necessitates a robust debt MF ecosystem,” tweeted Radhika Gupta, Managing Director, and Chief Executive Officer of Edelweiss Asset Management Limited.

According to the modification in the Finance Bill 2023, a “specified mutual fund” is “a mutual fund by whatever name named in which not more than 35% of its total revenues is invested in equity shares of domestic companies.”

Another significant revelation in Budget 2023 concerned market-linked debentures (MLD), which are similarly intended to be taxed as short-term capital gains.

Market Linked Debentures are non-convertible debentures with a variable return that is determined by the performance of the underlying index.

“Although the market size of outstanding MLDs is not huge in the perspective of debt capital markets, select NBFC issuers, particularly those with ratings of AA and below, have issued these bonds on a regular basis in recent years.” The tax arbitrage provided by these bonds, if sold before final fixing/maturity, has fueled demand for these debentures. As a result of the budget announcements, we expect demand to fall significantly, and those issuers who were issuing these MLD bonds will shift to plain vanilla debt issuances to raise resources,” said Amit Tripathi, CIO – Of fixed Income Investments, Nippon India Mutual Fund, in an interview with Business Today.