New Mutual Fund Rules Introduced With Effect From 1 April 2023. Will You Be Taxed More? Check Details.

A look at the new mutual fund rule proposed in the Finance Bill 2023

New Mutual Fund rules

Long-term mutual fund investments enjoy an indexation benefit while calculating income tax. Due to indexation, the purchase values of the mutual fund units are “inflation-adjusted”, which increases their value. This in turn reduces the profit and therefore the income tax thereon. This indexation benefit is being withdrawn from debt mutual funds.

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Details of the Amendment

The proposed amendment in Finance Bill 2023 says that mutual funds with less than or equal to 35% investment in equities will not be eligible for the long-term capital gain tax benefits. The capital gain derived from such mutual funds will be treated as short-term capital gains. 

Presently, such debt fund investors pay income tax on the capital gain as per their income tax slabs for up to three years of holding. After three years, such holdings are either taxed at 20% with indexation benefits or at 10% without indexation benefits.

Apart from debt funds, this rule will also apply to other non-equity funds like gold mutual funds, international equity funds and fund of funds.

This new rule will come into effect for all investments made after 1 April 2023.

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The Lost Advantage

Debt mutual fund investors have always enjoyed a tax arbitrage when they held it for over three years. The returns for such investments are taxed at 20.6% after indexation. For someone in the 30% tax bracket, this can lead to arbitrage gains, as they end up paying less tax than their slab.

Most fund houses expressed surprise at this decision. The Chairman of the Association of Mutual Funds of India, A Subramanian, pointed out the key role played by the mutual fund industry in the growth of the equity market as well as the bond market.

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Effect of the Amendment

It is expected that mutual fund houses may be disappointed with this amendment. The reason for this is that indexation provided debt mutual funds with a tax advantage when compared to other debt investment products like fixed deposits. But with this rule, the tax on the maturity sum of a bank deposit and that of a debt mutual fund will be the same. 

The beneficiary of this amendment could be products like sovereign gold bonds, bank FDs, equity mutual funds,, etc. Some of the investments planned to be made by investors in debt mutual funds may now be diverted to these alternate investment options. Banks will see this as an opportunity to attract more deposits and increase their deposit base. 



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