Government removed the LTCG tax benefit from debt mutual funds

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What is LTCG?

•  LTCG is 10% for gains in stocks and equity mutual funds. It is 20% for gains in real estate, debt funds and other assets along with the benefit of indexation. 
• Assets hold before the specified holding periods are subject to Short Term Capital Gains Tax (STCG). This is generally imposed at slab rate. 
• There was no LTCG on stocks and mutual funds before 2018, however Budget 2018 introduced LTCG of 10% for these assets.

Key amendments-

• According to the amendments announced by Union Minister of Finance, debt mutual funds having not more than 35 per cent invested in equity shares would be taxed at the income tax slab level. 
• In effect, they will be treated as short-term capital gain (STCG), in much the same way as bank fixed deposits (FDs).
• At present, debt mutual funds are treated as long-term investments if held for three years and taxed as long-term capital gains (LTCG) at 20 per cent with indexation benefit. 
• If held for less than three years, they are treated as STCG and taxed in accordance with the investor’s income tax slab.
• This is in addition to taxation of market linked debenture proposed in the original bill.
• The changes will come into effect from April 1, 2023 onwards.

Effects of these changes-

• According to experts, the change could lead to people shifting to safer bank FDs because of two reasons. 
• FDs are safer than debt mutual funds as they offer guaranteed returns unlike the later which are subject to market conditions. 
• Second, the similar taxation of debt funds to FDs have now robbed debt funds of the taxation benefit they enjoyed over FDs.
• Pure debt fund will lose its attraction over fixed deposits as far as tax benefits are concerned. Further life insurance products would be superior to debt mutual funds for annual investments up to Rs. 5 lakh. 
• The new regulations may impede the development of India’s debt capital market to some extent in this way.  However, this amendment shall only be applicable in respect of investments made post April 1, 2023 and there shall be no impact on investment made on or before March 31, 2023.

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