According to the amendment to the Finance Bill, income from investments in debt mutual funds where not more than 35% is invested in equity will attract short-term capital gains, while no benefit of indexation for the calculation of long-term capital gains will be available.
The amendments, experts said, do not only affect pure debt funds but hybrid funds, international funds, funds of funds, gold, etc.
The tax liability because of this amendment will essentially be the same for investors across the tax brackets they fall into, said some experts.
When asked how this change in taxation could affect participation and interest in such funds, Bhavik Thakkar of Abans Investment Managers said, “From a pure taxation view, investors will gauge their earlier tax outflow and the outflow post amendment before choosing the product.”
He further explained that under the old tax regime, investors had different debt products based on their investment time horizon.
For example, if an investor is looking for an option with a 3-year horizon, then he/she could look at market-linked debentures or MLDs and can go for any debt mutual fund if the time horizon is beyond three years.However, the tax rate will now be the same across products, Thakkar said.
Earlier, the tax benefit distinguished debt mutual funds from conventional debt investments such as bank fixed deposits, which could now get a boost, CRISIL Ratings said.
“This will make financial products like bank fixed deposits, debt mutual funds, and insurance savings products equally attractive for investors. This change might impact mutual fund houses that invest in fixed-income securities because they might get fewer investments as these other products become more attractive,” said S K Hozefa, CEO of Tradeplus.
Arguably, there could be some advantage in investing directly in government securities, even though there is extremely limited tax arbitrage, Thakkar said.
If the RBI cuts rates, there will be capital gains on government securities.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)