Tax Rules Change on Debt Funds: Before April 1, mutual fund companies are engaged in promoting debt schemes among those investors who want to take tax benefits through investment in the long term or who want to take advantage of indexation. The Central Government has abolished Long Term Capital Gains (LTCG) on debt schemes from April 1, which means it will no longer get the benefit of indexation. Due to this, many debt schemes have been re-opened for subscription by the fund houses. The Finance Bill has been approved in Parliament last week with important amendments, in which this provision has been made. At the moment when there is going to be a big change regarding tax rules in debt mutual funds, what should investors do with these schemes? And what options do they have?
Why are fund houses promoting
Debt mutual funds will not get the benefit of long-term capital gains tax from April 1, 2023. Only short-term capital gain (STCG) will have to be given on this. But LTCG and indexation benefits will continue to be available on all investments made till March 31, 2023. Due to this, the focus of the fund house is on increasing the maximum flow in such schemes before April 1.
What are the other options for tax saving
There are many other options for tax saving in the market. These include ELSS, FD, PPF, SCSS, SSY, NPS, and insurance schemes. If you are ready to take some market risk, then you can invest in Equity Linked Savings Scheme, where there is scope for higher returns in comparison. The lock-in for tax savings FDs of banks is of 5 years, while returns are given according to the fixed interest. The return date on this is similar to the scheme. Tax benefits under 80C can be availed on investment up to Rs 1.50 lakh annually in PPF, a scheme with a maturity of 15 years. The tax benefit is also available in SCSS, SSY and NPS.
What to do now in debt funds
AK Nigam, director of BPN Fincap, says that after the new rule, debt funds, FDs or hybrid funds will all become the same. But it is not that the attraction of the debt scheme will end. There is still no exit load on the debt, which means you can encash it anytime. Such a benefit is not available in other tax-saving schemes. On the other hand, if you invest money in debt funds till March 31, then the indexation benefit will continue to be available on it as before. With this, if you want tax benefits through these schemes with indexation, then you can invest money, especially in mid-duration debt funds. The returns in such schemes have improved and up to 8 per cent annual returns have been received, which is higher than FDs.
What is the indexation benefit?
Indexation benefits are indexed to inflation during the holding period and reduce your tax. When inflation is very high, the tax is reduced due to the indexation benefit. However, from April 1, this system is changing and like short-term gains, long-term gains will also be included in the income of investors and will be taxed according to the normal slab. That is, from April 1, investors will have to pay tax according to their tax slab on the income earned on such mutual fund investments. In such a situation, investors seeking tax benefits will suffer from this.
Currently, LTCG is taxed at 20 per cent for taking indexation benefits over a long period in debt funds and 10 per cent without indexation. But after the change, these tax benefits will be removed and tax will be levied according to the tax slab of the investor. Explain that short-term capital gains are levied on the income generated on selling debt mutual fund units before 36 months. But after the holding period of more than 36 months, the long-term capital gain is charged on the sale of the unit. Long-term capital gains are taxed at 20% with an indexation benefit.
