The implications of the budget amendments is as follows:
a) Pure Debt funds will now always be subject to STCG (Short Term Capital Gains).
b) Above is applicable for anything bought from 1st April 2023 onwards. Anything taken before that will continue to get the indexation benefit after 3 years.
c) Note clearly that this rule is applicable for any mutual fund with equity holding less than 35%. So, not only pure debt funds but funds like equity savings funds are also covered in this.
d) Since any mutual fund with less than 65% equity is classified as debt in MFs, now there will be three taxation rules applicable to mutual funds:-
i. Equity less than 35% - all proceeds are taxed as STCG, ie, on slab rates, irrespective of time period of holding.
ii. Equity between 35%+ and less than 65% - still classified as debt funds and indexation benefits available after 3 years. This seems more as an anomaly and likely to be cleared out later. However, the draft of finance bill amendment has it this way only as of now.
iii. Anything with 65% or more of equity will remain equity funds and be taxed as per the 1 year and more than 1 year rules.
Coming to whether debt funds now come at par with bank FDs, please do not forget two important aspects of debt MFs:
1. Corporate Debt funds will always give better returns than bank FDs. Pick up good quality corporate debt funds and you will always do better. In fact Banking & PSU Debt funds too are doing better now.
2. The powerful advantage of M2M (Mark to Market) available now and for say next 3 years or so would increase returns in Debt funds as interest rates go down. On the contrary, when rates go down, bank FDs will give lesser returns. The persistent inflation environment in US is delaying the rate cuts, but come they will, maybe a bit delayed.
Just to add, gold mutual funds would also be always taxed as short term capital gains on investments made on or after 01 Apr 2023.
Not only Gold funds but international funds and Fund-of-funds too.
Other View Point
In his commentary on this amendment, the Finance Secretary very logically said that the Govt wants similar instruments to have same taxation. So FDs and debt MFs come to same taxation.
May the best one be preferred by an investor as per his/her needs and comfort level.
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