What Happened?

As per the Finance Bill passed 24^th March 2023, both Short-term and Long-term capital gains with Debt Mutual Funds will be taxed as per the tax slab. The proposed change shall be effective from 1^st April 2023.

Transaction-Wise Update -

Systematic Transfer Plan (STP) - The long-term capital gains for Systematic transfers made within 31^st March 2023 shall still offer the 20% tax with indexation benefit. The new regulations shall apply to the subsequent instalments made.

Systematic Investment Plan (SIP) - The long-term capital gains for Instalments made within 31^st March 2023 shall still offer the 20% tax with indexation benefit. The new regulations shall apply to the subsequent instalments made.

Purchase - All purchases made in debt mutual funds w.e.f 1^st April 2023 shall be taxed as per the tax slab, regardless of whether it is a long term or short-term capital gain.

How Will This Affect You?

It is certainly a blow to debt mutual funds, as it will be taxed on par with fixed deposits, but its debt mutual funds should still be part of your portfolio due to the below reasons -

1) Tax deferral tool - taxes are not incurred every year on the interest unlike a Fixed Deposit

2) Liquidity - You shall receive the funds within T+1 day

3) Diversification - the money is diversified across various instruments, reducing risk.

To know more, contact us at 080-4124 5021/5022 or email us at support@finhancers.com

Possible Reasons for This Change

1) To simplify taxation on investments by bring Debt Mutual Fund taxation on par with Bank Fixed Deposits.

2) With defaults happening around the world, the move could be meant to reduce to credit risk of an investor.

3) To increase exposure to the equity markets.

4) To ensure Mutual Funds work more actively to generate returns.

5) To push NBFCs to actively procure funds by getting listed instead of borrowing and defaulting.

If you interested in knowing more, then click the link below -

https://forms.gle/q4Cdq87r1y23jKbm8

Other Points Made as Part of The Finance Bill

1. Withholding tax on Royalty/technical fees received by a non-resident shall be taxed at 20% instead of 10%

2. Securities transaction tax (STT) shall be taxed at 0.0125% from 0.01% for futures. Options shall be taxed at 0.0625% from 0.05%

3. Returns in the form of interest/dividends received from REIT/INVITs shall be treated as return of capital. Once the cumulative amount of interest/dividend exceeds the issue price, then the surplus amount will be taxable.

Example - If a REIT or InvIT had an issue price of ₹100 and in 2024, the amount distributed (as capital repayment) was ₹20, there will be no tax on this since it is lower than the issue price. If in future the trust’s cumulative distribution becomes ₹110, then ₹10 is taxed in the hands of the unitholder. If in the subsequent year the amount increases to ₹130, then tax will be on ₹20, since tax has already been paid on ₹10 in the previous year. Source: Business Line.