The Finance Bill 2023 proposes substantial changes to debt fund taxes in India. The revisions are intended to close tax loopholes utilized for investment by high-net-worth people and family offices. The proposed revisions have unfolded varied reactions, with some experts predicting a negative impact on the bond market and investments in debt mutual funds.
Investments in mutual funds with less than 35% invested in equity shares of Indian firms will be treated as short-term capital gains under the proposed reform. This applies to investments made on or after April 1, 2023. Moreover, debt mutual funds held for more than three years would no longer benefit from indexation and will not be eligible for the 20% tax rate. This means that investors in debt funds will have to pay income tax on capital gains based on their income tax slab for three years, after which they will be taxed at the slab level.
According to the heads of mutual funds, this idea is expected to eliminate arbitrage between various debt products and increase bank fixed deposits as well as pure equity funds. The goal is to close a tax gap that family offices and high-net-worth people employ for investing purposes. Yet this will affect gold mutual funds, global funds, and fund of funds.
A tax on the of debt held by unitholders of InvITs/REITs has also been suggested as part of the tax adjustments in the Finance Bill 2023. The proposed tax would only apply to the amount they received in excess of the issue price; redemption will not be a necessary condition. This would reduce the cost of the new tax on real estate investment trusts and infrastructure, as well as curb worries that the new tax might discourage future investments in these vehicles.
While closing tax loopholes is the goal of these proposed modifications, it’s crucial to remember that debt mutual funds have been able to invest a sizeable sum in the bond market. Debt mutual funds have been instrumental in mitigating the long-standing problem of bond market liquidity in India. Only the long-term investment in debt funds will be impacted by the suggested adjustments.
The proposed reforms to the taxation of debt funds in India are intended to close tax gaps that family offices and high net worth people utilize for investing purposes. The revisions will negatively affect the bond market and investments in debt mutual funds, even if they could benefit bank fixed deposits and pure equity funds. Investors must be aware of these developments in order to make wise investing choices.
