Pre-Book Today & Enjoy Exclusive Discounts!
Avoid Last-Minute Rush
Faster Refund Processing
Hassle-Free Filing with Experts
Debt mutual funds offer a reliable avenue for individuals seeking a steady stream of income. However, debt mutual fund taxation has undergone several changes over the years, with significant amendments occurring as recently as 2023. In this guide, we will delve into the world of debt mutual fund taxation, exploring how these changes affect investors and their financial decisions.
Debt mutual funds invest their resources predominantly in debt instruments like bonds, debentures, and other fixed-income securities. These instruments provide fixed income or interest every month without being affected much by market fluctuations. This makes them a preferred investment option.
The taxability of debt mutual funds has gone through many amendments in recent years, the latest one being the update in the year 2023. Given below is the taxability of debt mutual funds before and after the 2023 amendment -
As per the latest amendment in the taxability of debt, specified mutual funds can no longer avail of the benefit of indexation while calculating Long-term capital gains. So, debt mutual funds will be taxed at applicable slab rates.
Indexation benefits will also not be available for LTCG on gold mutual funds, international equity mutual funds, and hybrid mutual funds. This will increase the tax applicable on such profits.
Earlier, the taxation of debt mutual funds was affected by the period of holding -
Budget 2024, announced on 23rd July 2024, brought about certain changes in the long-term and short-term capital gains tax rates and holding periods. Given below is a table showing the comparison between the capital gains tax rates in FY 23-24 and FY 24-25.
Before budget 2024, the specified mutual funds (having more than 65% debt) were taxed at investor’s slab rates if the holding period exceeded 36 months. However, after the Budget 2024 update, this holding period has been reduced to 24 months.
Taxation for mutual funds
| Product | Before | After | ||||
|---|---|---|---|---|---|---|
| Period of holding | Short Term | Long Term | Period of holding | Short Term | Long Term | |
| Equity oriented MF units | > 12 months | 15.00% | 10.00% | > 12 months | 20.00% | 12.50% |
| Specified Mutual funds which has more than 65% in debt | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | Slab rate |
| Equity FoFs | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | 12.5% |
| Overseas FoF | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | 12.5% |
| Gold Mutual Funds | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | 12.5% |
Given below are the main variables that affect the taxation of mutual funds -
Here is the tax on debt funds as calculated before and after the investments -
Suppose Mr. Amit invested Rs. 10,00,000 in FY 2017-18 in a debt mutual fund. He sold the investment after three years in FY 2022-23 for Rs. 20,00,000, resulting in a capital gain of Rs.10,00,000.
| Particulars | FY | Cost Inflation Index (CII) | Amount (Rs.) |
|---|---|---|---|
| Investment Made | 2017-18 | 272 | 10,00,000 |
| Sale | 2022-23 | 331 | 20,00,000 |
| Less: Indexed Cost of Investment | (10,00,000*331/272) | (12,16,912) | |
| LTCG | (20,00,000-12,16,912) | 7,83,088 | |
| Tax Payable | Tax @ 20% | 1,56,618 | |
Tax Liability after the changes in Income Tax Rules
| Particulars | Financial Year | Cost Inflation Index (CII) | Amount (Rs.) |
|---|---|---|---|
| Sale | 2026-27 | - | 20,00,000 |
| Less: Investment Made | 2023-24 | - | (10,00,000) |
| Short-term capital gain | - | 10,00,000 | |
| Tax Payable |
Assuming you fall in: - 30% tax bracket - 20% tax bracket - 10% tax bracket |
3,00,000 2,00,000 1,00,000 |
|
LTCG taxation before and after the amendment.
| Tax Bracket | Before amendment | After amendment |
|---|---|---|
| 30% tax bracket | 1,56,618 | 3,00,000 |
| 20% tax bracket | 1,56,618 | 2,00,000 |
| 10% tax bracket | 1,56,618 | 1,00,000 |
From the above example, it is clear that the changes in income tax rules will have a negative impact on the people falling under the 20%-30% tax bracket.
The recent changes in which the indexation benefit provided on long-term capital gains have been scrapped will hugely impact the investors as they will have to shell out more money in the form of taxation. Despite all this, there are various benefits of investing in debt mutual funds -
While the taxability of debt mutual funds has increased with the recent changes announced in budget 2023, it is important to understand that there are various other ways to save taxes on capital gains. If you are also planning to invest in debt mutual funds, then you can seek advice from our tax experts.
Want to find out about other ways of saving capital gains tax? Talk to our experts and get the best tax-saving advice. Book Tax Consultation Now!
The income received from the debt mutual fund is considered as the income of the investor and added to the total income under the head income from other sources. This income has to be disclosed under the head income from other sources in ITR-1.
No, debt funds are not tax-exempt. They are subject to taxation only at the time of sale or transfer of the capital asset.
No, TDS is not deducted on debt mutual funds. In the case of FDs, tax is payable throughout the year as soon as the interest is accrued. However, in the case of debt mutual funds, the tax liability arises only when the asset or the mutual fund is sold or transferred.
