Debt fund taxation change: With no indexation benefit, should you still include debt funds in your investment portfolio?

Does the removal of the indexation benefit make debt funds less attractive? How do they now compare with bank fixed deposits, and which one should you choose for investment?

During the 2023 Budget Session of Parliament, one of the amendments to the Finance Bill included a key change in the way debt funds are taxed. The change classified the capital gains on debt funds as short-term capital gains (STCG), irrespective of the holding period. The capital gains will not get the benefit of a lower tax rate of 20% with the indexation benefit. The STCG will be taxed at the individual’s marginal tax rate. The taxation change was not announced during the Budget 2023 speech and is a big blow to the debt fund industry. In this article, we will understand the changes in debt mutual funds taxation, the impact with and without indexation, how debt funds compare with fixed deposits after the taxation change, and whether investors should invest in debt funds. What is a debt...

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