Investing in Debt Mutual Funds? Note the change in Taxability
The Modi Government has introduced a tax amendment to the Finance Bill 2023 that will boost certain investment avenues. The new rules state that debt mutual funds with less than 35% of their AUM invested in equity will no longer receive long-term capital gains. Instead, income from these funds will be treated as short-term capital gain and taxed at the investor’s slab rate starting from 1st April.
This new rule also applies to capital gains from international funds, gold funds, hybrid funds, and domestic equity funds of funds that do not invest more than 35% in equity, regardless of their holding period.
As a result, bank fixed deposits, equity mutual funds, sovereign gold bonds, physical gold, and corporate bonds may become more attractive investment options.
Here’s a look at 5 investment avenues that may become more attractive.
Fixed Deposit: Due to the new tax law, bank fixed deposits will be at par with debt mutual funds. Due to the elimination of distinctions in debt instruments, this shift might make bank FDs more attractive. According to experts, this might hurt all debt funds, particularly those in the retail sector, since high net worth individuals may choose to invest in secure choices like bank fixed deposits.
Equity Mutual Funds: According to experts, the absence of LTCG benefits on debt funds may cause investors to shift their money to equity/growth mutual funds. It’s possible that long-term debt funds will give way to equity funds.
“Due to tax advantages, the industry may potentially observe a transfer of capital from long-term debt funds to equity-oriented funds. Corporates and HNIs who invested in debt MFs for a shorter term (less than 3 years) will not be impacted by the move.
Sovereign Gold bonds: The new tax change will dull the appeal of gold ETFs and increase the attraction of sovereign gold bonds. According to experts, more capital may now be invested in Sovereign gold bonds.
Physical Gold: Investors in physical gold will continue to profit from the LTCG tax at 20% with indexation, which is applicable when the Gold is sold after three years of acquisition, according to tax experts.
Corporate bonds: Due to a resurgence in interest from ordinary investors, corporate bonds may also profit from the new tax regulations.