There has been a major development today as per taxation rules applicable to Debt Funds. Before we move ahead, first thing first. This proposed change in taxation rules is applicable on Fresh investments coming in Debt Funds with effect from 1st April 2023 and is not from retrospective effect.
There has been a major development today as per taxation rules applicable to Debt Funds.
Before we move ahead, first thing first.This proposed change in taxation rules is applicable on Fresh investments coming in Debt Funds with effect from 1st April 2023 and is not from retrospective effect.
So there is no need to Panic!!
Let us start with understanding which all Debt Funds are getting effected -
Now lets move ahead what this proposed amendment in Finance Bill is stating –“It talks about Mutual Fund Investment where no more than 35% is invested in equity shares of Indian Companies will be treated as Short Term Capital Gains and would be taxed at marginal rate”.
Now, investors of debt mutual funds would have different questions Lets try to explore them one by one.
What happens to the money which is already deposited in debt mutual funds. Would this indexation benefit be applicable to them?
Ans. Yes, there is no impact on Debt investments which have been made earlier to April 1 2023.
Would Debt Funds still have some advantage over Fixed Deposits?
Ans.Yes there are two major advantages which mutual funds will still continue to enjoy over Fixed Instruments but with certain assumptions.
One is deferment of tax till the time you actually make withdrawal from Debt investment vis a vis FDR where you are taxed every financial year. The assumption here is you are carrying on with your investments in Debt Funds year on year and not withdrawing out of it.
Second advantage is on cash flow basis wherein debt mutual fund again proves to be superior to FDR.
In addition to above assumption of investment being carried year on year and only the appreciation made year on year basis is withdrawn. If you withdraw th entire investment of Debt Fund this advantage will not hold good.
Click on the link to see this calculation in the video posted on our you tube channel. Scroll Directly to 4.35 mins
What could have been the reason for Govt to bring such change?
Ans. Just a guess on this front as exact reason why Govt did we do not know, it could have been the result of strong lobby from Banking industry who have been losing market share of deposits to Mutual Funds. Off lately Targeted mutual funds have seen very good retail participation. Needless to say, Govt was losing on tax revenues as well.
Where this money which was earlier getting invested in Debt Funds can be invested now?
Ans. Investors could consider Non-Convertible Debentures, Corporate FDRs, Sovereign Gold Bonds Funds.
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