The govt has changed the way debt funds are taxed
Earlier, #debtfunds had a tax advantage over FDs
Investors paid lower taxes in debt funds for investments over 3 yrs
Now, both will get the same tax treatment
So, are #FDs more attractive now?
Are debt funds irrelevant? A π§΅
Earlier, #debtfunds had a tax advantage over FDs
Investors paid lower taxes in debt funds for investments over 3 yrs
Now, both will get the same tax treatment
So, are #FDs more attractive now?
Are debt funds irrelevant? A π§΅
Letβs first understand what has happened.
Following the Budget announcements, the #government tables the Finance Bill in the Parliament.
This time, The Finance Bill 2023 had a surprise.
Following the Budget announcements, the #government tables the Finance Bill in the Parliament.
This time, The Finance Bill 2023 had a surprise.
What was the surprise?
It changed the taxation of some mutual fund categories.
The Bill mentions: From Apr 1, there will be no long-term tax benefits for funds that invest less than 35% of their corpus in Indian equities.
This change is critical for investors.
It changed the taxation of some mutual fund categories.
The Bill mentions: From Apr 1, there will be no long-term tax benefits for funds that invest less than 35% of their corpus in Indian equities.
This change is critical for investors.
Take the case of debt funds.
Currently, if you sell them after 3 years, your profit is called long-term capital gain (LTCG).
And investors need to pay a 20% tax on their LTCG after factoring in inflation.
So, the effective tax is considerably lower than 20%.
Currently, if you sell them after 3 years, your profit is called long-term capital gain (LTCG).
And investors need to pay a 20% tax on their LTCG after factoring in inflation.
So, the effective tax is considerably lower than 20%.
Now, all this is set to change.
Irrespective of your holding period, gains from debt funds will be added to your income and taxed as per your slab rate.
So, just like FDs, if you fall in the 30% tax bracket, you will pay 30% tax on your debt fund gains.
Irrespective of your holding period, gains from debt funds will be added to your income and taxed as per your slab rate.
So, just like FDs, if you fall in the 30% tax bracket, you will pay 30% tax on your debt fund gains.
What does this mean for investors?
The long-term tax benefit was a key reason that made debt funds more attractive.
But FDs make a lot more sense now, especially in the current environment when FD rates are high.
Example: You can get up to 8.2% on FDs available on ET Money.
The long-term tax benefit was a key reason that made debt funds more attractive.
But FDs make a lot more sense now, especially in the current environment when FD rates are high.
Example: You can get up to 8.2% on FDs available on ET Money.
Debt funds do make sense in some cases.
Why?
-> There is no TDS
-> You pay tax only when you redeem
-> They donβt have any lock-in
And Liquid Funds or Money Market Funds can potentially give better returns than FDs for a period of less than one year.
Why?
-> There is no TDS
-> You pay tax only when you redeem
-> They donβt have any lock-in
And Liquid Funds or Money Market Funds can potentially give better returns than FDs for a period of less than one year.
Debt funds may still be a viable option if you want to avoid locking in your money for a year or so.
But if you want your money after a year and are okay with the lock-in, FDs can be better.
But if you want your money after a year and are okay with the lock-in, FDs can be better.
One more thing.
The new tax rule also applies to international funds, gold funds or any other fund that invests less than 35% of its corpus in Indian equities.
So these funds may lose their shine as well.
What do you feel?
Comment below and let us know.
The new tax rule also applies to international funds, gold funds or any other fund that invests less than 35% of its corpus in Indian equities.
So these funds may lose their shine as well.
What do you feel?
Comment below and let us know.
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