As an investor in mutual funds, you may already know of the Centre’s decision to scrap the long term capital gains tax (LTCG) on debt mutual funds. The decision has been made in Parliament amid a lot of uproar from the Opposition. Let’s take a look at what the Government has decided about debt mutual funds in India.
Previously, debt mutual funds used to be held for the short term (less than 36 months) as well as for the long term (more than 36 months). Short term holding was less than 3 years while long term holding was more than 3 years. Accordingly, the tax was calculated on the STCG (short term capital gains) and the LTCG (long term capital gains) respectively.
Now, there is a new rule for those debt mutual funds in India where the equity investment is less than 35%. According to the new rule, all the gains from the debt mutual funds with less than 35% exposure to equity will be treated as STCG and will be taxed as per the investor’s income tax slab.
There will be no indexation benefits (adjustment for inflation) in the debt mutual funds any longer. This move from the Centre has made debt mutual funds equal to fixed income products from the banking sector like fixed and recurring deposits.
There has been a backlash from the mutual fund industry which is likely to see an outflow of investment away from the debt mutual fund arena, often thought to be a better investment than fixed deposits, into the banking sector.
The move has made debt mutual funds in India equivalent to bank deposits. Or has it? Experts are of the opinion that debt mutual funds and the bond market will continue to attract investment despite the move.
However, post 1st April, retail investors may pull out of the debt mutual fund industry. Experts also feel there is likely to be a loss in growth potential of this industry.
Retail investors should seek professional advice from a mutual fund agent like Money Assist to understand better where they should put their money. While there has been an uproar from various corners, there isn’t any reversal of the decision likely to be taken.
Debt mutual funds in India no longer look as attractive as they did before to the retail investor. However, to know whether this is a better investment than putting your money in bank FDs, you will need professional counsel from Money Assist.
