The Finance Act 2023 recently amended the relevant provision for long-term capital gains (LTCG) to keep debt-oriented mutual funds out of their ambit.
And since the new rules will come into effect from April 1, 2023, some investors could opt for debt funds on or before March 31 so that their investment is eligible for long term capital gain benefits.
Let us understand what it means. If an investor buys debt mutual funds after April 1, 2023 and sells them, the gains will be added to the investor’s gross income, and will be taxed as per the tax slab s/he falls under. Should the taxpayer fall under 30 percent tax bracket, the tax levied on mutual fund gains will be 30 percent.
Earlier, upon selling the debt funds after holding them for more than three years, the gains were treated as long term capital gains (LTCG). This effectively means investor could avail indexation benefits and the applicable tax rate was 20 percent.
Should you invest in debt funds now?
So, to be able to avail indexation benefits and a lower tax rate, one can choose to invest in debt funds prior to March 31, 2023
Experts, however, recommend that taxation is not the only factor to determine a financial instrument’s potential.
Sridevi Ganesh, co-founder of Chamomile Investment Consultants says that investors have several options to choose among fixed income instruments such as PF, PPF and NPS.
“Even if one invests now, one will have to pay tax at some point of time. So, I don't recommend that one should rush to invest in debt funds,” she says.
To elaborate further on this, she says that tax should not be the most important criteria for choosing any investment.
“One should not invest if their risk appetite does not allow. That would mean relying too much on one factor,” adds Ms Ganesh.
About the intent to invest in debt-oriented funds in the next few days, Sreedharan Sundaram, Founder of Wealth Ladder Direct, says investors can invest in debt funds if they want to, but the decision should not be determined solely by the tax treatment of financial instrument.
He also says the new tax rule has created a level-playing field for an array of debt instruments.
However, he clarifies that debt funds will continue to score over other fixed income instruments such as fixed deposits (FDs) even after the new tax rules come into force.
“Unlike in debt funds, partial withdrawal is not possible in case of fixed deposits (FDs). Also, one must pay the tax in case of fixed deposits even if the gains are unrealised. But in case of debt funds, one has to pay tax only at the time of redemption,” he adds.
In conclusion, we can say that although investors can opt for investing in debt funds before March 31 if they want to save on taxation but it is recommended to invest only if their asset allocation allows it. Choosing a financial instrument purely from the lens of tax is not recommended.
