Asset managers are concerned about tweaks being proposed to India’s tax rules that could impact the nation’s $150 billion fixed-income mutual fund industry.
An amendment to the Finance Bill, expected to be tabled in parliament on Friday, will make holders of certain debt funds ineligible to claim long-term capital gains benefits.
Indian debt mutual funds had net assets under management of $150 billion as on February 28, according to the Association of Mutual Funds in India.
Investment in mutual fund where not more than 35% is invested in equity shares of Indian company (debt funds) will now be deemed to be short-term capital gains.
The proposal will be applicable to investments made on or after April 1, 2023.
As of now, debt mutual funds are treated as long-term investments if held for more than 3 years and taxed at the rate of 20% along with indexation benefits or 10% without indexation.
Those with a holding period of less than 3 years are taxed according to their tax slab.
With the changes, investments in debt mutual funds will be taxed as short-term capital gains only. There will be no indexation benefit and tax at a 20% rate.
Indexation helps investors to bring down taxes as it calculates the taxes after accounting for inflation.
With the amendments, debt funds held for more than three years will no longer enjoy indexation benefits.
Experts say that these changes are proposed to bring bank fixed deposits (FDs) on-par with debt mutual funds. Currently, debt fund investors enjoy a tax advantage over FDs.
Another point to note is that retail investors are currently not that big in the fixed income category. This means institutional clients and HNIs would be mostly hit.