According to reports, the center is introducing a change in the rules for mutual funds in the financial statement on Friday. Debt MF investors will no longer receive the long-term capital gains tax benefit. They are taxed like bank deposits. It applies from April 1st.
The changes are expected to be introduced houses of Parliament Today.
What are the current rules of taxation based on Investment funds?
At the moment, debt fund Investments of more than three years qualify in the long term capital gain Tax. Your winnings are taxed at 20 percent indexing Benefits or 10 percent without indexing. Investments of less than three years are subject to short-term profits tax and the investor must pay tax on his record set.
indexing offers investors significant tax advantages, especially when inflation is high.
What is indexing?
Indexing is a process that allows an investor to account for inflation in the profits made debt fund reduce overall tax expenditure. This is done through a mechanism using the Cost Inflation Index (CII). The CII adjusts the purchase price of an asset for inflation in the year it is sold.
It calculates taxes after accounting for inflation. In an environment of high inflation, the tax liability is therefore significantly reduced. India is currently facing high inflation and indexing is therefore all the more relevant.
What are the new mutual fund rules?
According to the proposed change debt fund with less than or equal to 35 percent invested in stocks are taxed at the investor’s income tax plate and treated as short-term capital gain. This is similar to the taxation of bank deposits in India.
In addition, in the above case, the mutual funds in debt securities will also not allow indexation from April 1st.
Investors mainly opt for debt fund because of the tax advantage they offer over fixed-term deposits (FDs).
“It’s treated more like FD income and taxed accordingly in the hands of a debt fund Shareholders,” said Maneet Pal Singh, Partner, IP Pasricha and Co Reported Medias.
The new changes also apply to gold, international stocks and even domestic stock funds of funds (FoFs).
“Debts Investment funds had a favorable tax regime compared to banks’ fixed deposits and small savings,” said Amit Maheshwari, Tax Partner at AKM Global Reuters this debt Investment funds are now taxed the same as other investments. “This could affect how debt funds invest in corporate bonds.”
Maheshwari said this proposed move is mainly targeting high net worth individuals who are using this investment as a tax saving tool.
Why the new rules?
“It is evident that the government intends to eliminate tax arbitrage by creating a consistent tax policy for all debt instruments. In this regard, the Government has proposed a similar tax policy for proceeds from insurance products (savings) where annual premiums exceed Rs 5 lakh will be taxed after March 31,” said Manish Hingar, Founder of Fintoo.
Who is affected by the change?
“That the tax implications for long-term investments in debt-linked funds are on par with Bank FD appears to be a major blow to the nascent debt market and a push toward the stock market,” said Geetanshu Bhalla, director of The Virtual Compliance.
“Among retail investors, seniors seem to be hit the hardest, who can get a TTB80 annual deduction on interest on term deposits but not on gains from debt funds,” he said.
However, he added, the proposed provision must not affect the investment strategy of new or younger investors investing in debt funds for a shorter period in order to seek higher returns, nor HNIs or companies whose investment strategy is not heavily impacted by tax implications.
“We may see a shift from long-term debt funds to equity funds, and money could be channeled into government gold bonds, bank deposits and non-convertible debt securities in the debt category. This is good news for banks as they can attract customers with higher interest rates and increase their lending and savings book size,” Hingar said.
Who is protected from the new changes?
Any existing or new investments made before March 31 will not be affected by the proposed mutual fund tax change.