The government has proposed changes in taxation of debt mutual funds under which no benefit of indexation for calculation of long-term capital gains (LTCG) on debt mutual funds will be available for investments made on or after April 1, 2023. However, as per the proposed changes in the Finance Bill 2023, only those debt mutual funds will lose these benefits where equity investment in such schemes is less than 35 per cent. From April 1, 2023, such debt mutual funds will be taxed at income tax rates as per an individual’s income. The move will remove the tax advantage a debt mutual fund has compared to bank deposits. Commenting on the development, Fintoo Founder Manish P Hingar said with the proposed amendments debt mutual funds may no longer receive indexation benefits and will be taxed at marginal rates. “This will also affect gold funds and international funds. As a result, bank fixed deposits will become more attractive as both debt funds and bank fixed deposits will be subject to the same taxability of maturity proceeds,” he said. This may have a negative impact on all debt funds, particularly in the retail category, as ultra-high net worth and high net worth individuals may choose to invest in safe havens like bank fixed deposits. “We may see a shift from long-term debt funds to equity funds, and money may be directed towards sovereign gold bonds, bank fixed deposits, and non-convertible debentures in the debt category. This is good news for banks as they can attract customers with higher interest rates and increase their borrowing and saving book sizes,” Hingar said. According to Niranjan Avasthi, Head, Product, Marketing and Digital Business, Edelweiss AMC, the removal of indexation benefits from debt mutual funds is a big loss for bond markets that are still struggling with liquidity. “MFs are the only large active institutional investors who bring whatever little liquidity we have in the bond market. Insurance and some others are HTM investors,” Avasthi wrote on twitter. Shares of HDFC AMC was down 4.76 per cent and that of Aditya Birla Sun Life AMC fell 2.76 per cent in intra-day trades.
