Tax Blow for Debt Mutual Funds!

Debt Mutual Funds!

Debt Funds will now be taxed just as Fixed Deposits. What’s next?

Ask any individual who falls in the 30% tax bracket which investment option they would choose to save tax – Debt funds or Fixed deposits? 

Without a second thought, they would choose debt mutual funds. After all, they offer a special tax benefit called indexation, which can help investors save a lot of taxes. 

However, starting from 1st April 2023, debt funds will lose their charm. 

The government has proposed in the finance bill that debt funds held for over three years will no longer enjoy indexation benefits. So, what does this mean for investors? Well, it means that debt mutual funds will be taxed just like fixed deposits! 

We know this is a shocker, but don’t worry. Let’s dive into the nitty-gritty details of the matter, so you can make informed investment decisions going forward.

What’s Happening?

In a major setback for debt mutual funds, the government has proposed a change in the Finance Bill that will shake things up. From April 1, 2023, any investment in mutual funds where not more than 35% is invested in equity shares of Indian companies will now be deemed as short-term capital gains. 

But wait, there’s more. It gets worse for debt mutual funds. The new changes will also mean that debt funds held for over three years will no longer enjoy the indexation benefit. And that’s not all. These funds will no longer be eligible for the 20% tax rate.

Let’s understand how your taxation would change without indexation benefits. 

Why is Zero Indexation a Big Blow for Debt Funds?

Let’s say, three years back, you invested Rs 1 lakh in debt mutual funds at an interest rate of 10% per annum. At the end of the three-year tenure, you would have earned a simple interest of Rs 10,000, making your gains Rs 30,000 after three years.

Note that we are considering simple interest. Also, indexation benefits are calculated according to Cost Inflation Index (CII). But, in this example, we will skip the CII part and take the normal inflation rate to understand the concept clearly. 

Let’s assume that inflation is at a modest 7% in our example. After adjusting for inflation, your actual returns would be only 3% (10% – 7%). That means your real earnings on your investment would be only Rs 3,000 per year, or Rs 9,000 over three years. If you sell your debt fund after three years, you will pay a tax of 20% on your inflation-adjusted capital gains

If you had invested the same amount in an FD, you would be taxed based on your tax bracket. If you fall into the 30% tax bracket, you will pay 30% on the entire capital gain.

There was a time that high tax brackets and debt funds were a match made in financial heaven. But, all those good old days are no more so good because the taxation on debt mutual funds is now comparable to that of fixed deposits. 

What Should Investor Do?

Investing can be tricky, especially when inflation is rising, interest rates are climbing, and taxes are biting harder than ever. All of these factors combine to make earning real returns a daunting task.

The recent increase in Securities Transaction Tax (STT) on Options selling is just one example of how investing is becoming more difficult. The simple equation is that the returns you earn are eroded by inflation and taxes, leaving you with little real return.

However, in such times, equities offer the best opportunity for earning a maximum real return. But, investing blindly without proper research is a recipe for disaster. That’s where we, Teji Mandi, can handhold you. Our Flagship and Multiplier portfolios are expertly curated to help you achieve your long-term goals.

At Teji Mandi, we understand that earning real returns requires careful analysis and the selection of quality stocks. So, all you need to do is invest, sit back and relax. Our expert research team will take care of the rest. 

Don’t let anything hold you back. Invest with Teji Mandi now!

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