Upcoming Amendment to Impact Debt Mutual Fund Returns
Revisions to Indexation Benefits
Attention investors! The Budget 2023 proposes significant changes that will affect the tax treatment of debt mutual funds, potentially impacting your returns.
Ending Indexation Benefits
As per the amendment, Specified Mutual Funds will no longer receive indexation benefits. Indexation, which was previously used to reduce the impact of inflation on capital gains, will no longer be applicable for debt mutual funds.
Higher Tax Rates
The absence of indexation benefits means that long-term capital gains (LTCG) on debt mutual funds will now be taxed as per the income slab of the investor. This translates to higher tax liability for those in higher income brackets.
Historical Classification and Tax Treatment
Prior to April 1, 2023, debt mutual funds were classified as follows:
- Short-Term: Held for less than 3 years
- Long-Term: Held for more than 3 years
LTCG on debt mutual funds held for more than 3 years was subject to a 10% tax rate. However, indexation was allowed, which reduced the tax liability by adjusting the cost of acquisition for inflation.
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