Last Chance to benefit from the change in Debt Mutual Funds Taxation

Naturally, we are all very concerned about how the latest norms will affect our investments. Here, a group of investors - John, Emma & Raj have gathered to discuss the recent changes in the taxation of Debt Mutual Funds.

John: Did you all hear about the recent changes in Debt Mutual Funds taxation?

Emma: Yes, I heard about it in the news! The government has proposed a change to the Finance Bill 2023 that will affect the long-term tax benefit for Debt Mutual Funds.

Raj: That's right..! And according to personal finance experts, this proposal will bring bank Fixed Deposits on-par with Debt Mutual Funds.

John: Oh! But how? 

Emma: Until now, Debt Mutual Funds offered an indexation benefit on long-term capital gains,i.e., if you held onto your investments for 3 Years! Fixed Deposits didn't offer this perk. However, starting from 1st April 2023 - Debt Mutual Funds will also no longer offer this benefit.

Let's say you invested Rs. 1,00,000 in a debt mutual fund in March 2019 and redeemed the investment in March 2022 for Rs. 1,20,000. During this period, the cost inflation index (CII) increased from 280 in 2019-20 to 317 in 2021-22.

Without indexation benefit, the capital gain would be calculated as follows:

Capital gain = Sale price - Purchase price = Rs. 1,20,000 - Rs. 1,00,000 = Rs. 20,000

However, with indexation benefit, the purchase price is adjusted based on the CII for the relevant financial years. The indexed cost of acquisition is calculated as follows:

Indexed cost of acquisition = (Purchase price x CII of year of sale) / CII of year of purchase

= (1,00,000 x 317) / 280
= Rs. 1,12,857

Therefore, the capital gain with indexation benefit would be calculated as follows:

Capital gain = Sale price - Indexed cost of acquisition

= Rs. 1,20,000 - Rs. 1,12,857
= Rs. 7,143

As you can see, the indexation benefit has significantly reduced the capital gains, and therefore, the tax liability of the investor.
 
Raj: Emma, wait, but what about my investments that I made before 1st April 2023?

John: This is a valid point!!

Emma: They will remain unaffected. So, the catch here is - all investments made before 31st March 2023 will enjoy the long term indexation benefit.

John: Well, we all need to evaluate our investments in Debt Mutual Funds & see how this change will impact our returns. It may be a good idea to diversify our investments and explore other options such as equity-oriented schemes. 

Raj: That's a good suggestion. Also, we can invest before 31st March 2023 & take advantage of this benefit to make the most of it.

John: I agree. Let's do our research & make informed decisions. Also, by taking advantage of this opportunity, we can enjoy the benefits of indexation by investing in Debt MFs at the moment - which inturn will help us to save on taxes!!

Emma: Right John, Debt Mutual Funds are considered one of the safest investment options out there! Let's do some research and see if they could be a good fit for us.

In conclusion, the recent changes in debt mutual funds taxation may impact investors differently. It's important to evaluate our investments & make informed decisions based on our financial goals and risk tolerance.

Key Takeaways in 6 points:

● Debt Mutual Funds are considered as low risk investments as they invest in government securities.
● Investment in these Mutual Funds for more than 3 Years is categorized as Long term Capital Gains.
● These Gains are further taxed at 20% tax rate with indexation benefit.
● Indexation helps to bring down taxes as it  accounts for inflation & this also lowers the tax payable by the investor.
● As per latest norms, all investments before 31st March 2023 will continue to enjoy the indexation benefit.
● Investors can make informed decisions based on their risk tolerance.

While Picking a good Debt Fund in a short span can be tricky, but with 5paisa's top recommended funds you can find below the funds with proven track record: