- Date : 12/04/2023
- Read: 3 mins
Learn about the impact of recent changes to mutual fund taxation on debt investments. Explore NFO withdrawals and loss of LTCG tax benefits in this article.
Axis Mutual Fund and Aditya Birla Sun Life Mutual Fund have recently cancelled their new fund offers (NFOs). The Axis S&P 500 ETF and Aditya Birla Sun Life Crisil IBX SDL Sep 2028 Index Fund were available for subscription from March 22 to April 5 and March 27 to April 5, respectively. The withdrawal of these schemes was due to changes made to mutual fund taxation in the Finance Bill, which shifted investor focus towards existing debt funds.
Also Read: Debt Fund Taxation Rule Changes. What Expert Wealth Managers Say?
What is the new rule?
The new taxation rule stipulates that capital gains from mutual fund investments where less than 35% was invested in domestic equities would be added to one’s income and taxed at the slab rate applicable to them. Debt mutual funds will no longer enjoy the benefits of LTCG and indexation on fresh investments. This change in taxation is expected to benefit bank fixed deposits and pure equity funds.
What was the previous taxation rule?
Under the previous taxation regime, any capital gain made on the redemption of a debt fund held for three years or longer was considered an LTCG. Such long-term capital gains were taxed at a flat 20% after indexation. This LTCG benefit, along with indexation, had been an attractive investment tool for higher-income bracket individuals looking for long-term investment alternatives to fixed deposits.
How has the new taxation affected debt mutual fund investment?
The new taxation regime has affected the NFOs since debt fund NFOs are required to collect at least Rs. 20 crores, while the threshold for other fund types is Rs. 10 crores. The funds failed to acquire the minimum subscription amount. According to industry experts, investors' and distributors' focus remained on existing debt mutual funds to take advantage of the favourable taxation regime. Industry reports suggest that Rs. 40,000 crores were pumped into existing debt mutual funds to benefit from the favourable tax regime until March 31.
The proposed changes, however, will not affect any current or future investments made in debt funds, overseas funds, or gold funds until March 31, 2023. They will still be eligible for the preferential LTCG tax treatment.
In conclusion, changes in mutual fund taxation in the Finance Bill have led to the withdrawal of NFOs, and investors' focus has shifted to existing debt mutual funds. The new taxation regime has eliminated the benefits of LTCG and indexation for fresh investments in debt mutual funds, making fixed deposits an attractive investment option once again. However, existing investments made in debt funds, overseas funds, or gold funds until March 31, 2023, will still be eligible for preferential LTCG tax treatment.
Axis Mutual Fund and Aditya Birla Sun Life Mutual Fund have recently cancelled their new fund offers (NFOs). The Axis S&P 500 ETF and Aditya Birla Sun Life Crisil IBX SDL Sep 2028 Index Fund were available for subscription from March 22 to April 5 and March 27 to April 5, respectively. The withdrawal of these schemes was due to changes made to mutual fund taxation in the Finance Bill, which shifted investor focus towards existing debt funds.
Also Read: Debt Fund Taxation Rule Changes. What Expert Wealth Managers Say?
What is the new rule?
The new taxation rule stipulates that capital gains from mutual fund investments where less than 35% was invested in domestic equities would be added to one’s income and taxed at the slab rate applicable to them. Debt mutual funds will no longer enjoy the benefits of LTCG and indexation on fresh investments. This change in taxation is expected to benefit bank fixed deposits and pure equity funds.
What was the previous taxation rule?
Under the previous taxation regime, any capital gain made on the redemption of a debt fund held for three years or longer was considered an LTCG. Such long-term capital gains were taxed at a flat 20% after indexation. This LTCG benefit, along with indexation, had been an attractive investment tool for higher-income bracket individuals looking for long-term investment alternatives to fixed deposits.
How has the new taxation affected debt mutual fund investment?
The new taxation regime has affected the NFOs since debt fund NFOs are required to collect at least Rs. 20 crores, while the threshold for other fund types is Rs. 10 crores. The funds failed to acquire the minimum subscription amount. According to industry experts, investors' and distributors' focus remained on existing debt mutual funds to take advantage of the favourable taxation regime. Industry reports suggest that Rs. 40,000 crores were pumped into existing debt mutual funds to benefit from the favourable tax regime until March 31.
The proposed changes, however, will not affect any current or future investments made in debt funds, overseas funds, or gold funds until March 31, 2023. They will still be eligible for the preferential LTCG tax treatment.
In conclusion, changes in mutual fund taxation in the Finance Bill have led to the withdrawal of NFOs, and investors' focus has shifted to existing debt mutual funds. The new taxation regime has eliminated the benefits of LTCG and indexation for fresh investments in debt mutual funds, making fixed deposits an attractive investment option once again. However, existing investments made in debt funds, overseas funds, or gold funds until March 31, 2023, will still be eligible for preferential LTCG tax treatment.
