{"id":34075,"date":"2023-03-25T01:42:29","date_gmt":"2023-03-24T20:12:29","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=34075"},"modified":"2025-06-30T12:04:30","modified_gmt":"2025-06-30T06:34:30","slug":"long-term-tax-benefits-removed-for-debt-mutual-funds","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/long-term-tax-benefits-removed-for-debt-mutual-funds\/","title":{"rendered":"Long-term Tax Benefits Removed for Debt Mutual Funds"},"content":{"rendered":"<h3><strong>What\u2019s in today\u2019s article?<\/strong><\/h3>\n<ul>\n<li><strong>Why in News?<\/strong><\/li>\n<li><strong>What are Mutual Funds?<\/strong><\/li>\n<li><strong>About Equity MFs &amp; Debt MFs<\/strong><\/li>\n<li><strong>Taxation on Debt Mutual Funds<\/strong><\/li>\n<li><strong>What is Indexation Benefit?<\/strong><\/li>\n<li><strong>Present Status of Indexation Benefit in Debt Mutual Funds<\/strong><\/li>\n<li><strong>Change Brought in Through Finance Bill 2023<\/strong><\/li>\n<li><strong>Impact of the Proposed Amendment<\/strong><\/li>\n<\/ul>\n<p><strong>\u00a0<\/strong><\/p>\n<h2><strong>Why in News?<\/strong><\/h2>\n<ul>\n<li>The Union Government, through <strong>Finance Bill 2023<\/strong>, has proposed changes in taxation of debt mutual funds.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>What are Mutual Funds?<\/strong><\/h2>\n<ul>\n<li>A mutual fund is a pool of money managed by a professional Fund Manager(s).<\/li>\n<li>That money is used to purchase stocks, bonds and other securities.<\/li>\n<li>Because mutual funds invest in a collection of companies, they offer instant diversification (thus <strong>lower risk<\/strong>) to investors. MF investors share in the fund\u2019s profits and losses.<\/li>\n<li>The two most prevalent types of mutual funds are <strong>Equity Mutual Funds<\/strong> and <strong>Debt Mutual Funds<\/strong>.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>About Equity MFs &amp; Debt MFs<\/strong><\/h2>\n<p>Equity mutual funds are <i><strong>equity-oriented mutual funds that invest in shares, bonds, and other securities<\/strong><\/i>.<\/p>\n<ul>\n<li>Debt mutual funds <i><strong>invest primarily in debt securities such as government and corporate debt<\/strong><\/i>.<\/li>\n<li><i><strong>In terms of safety, debt mutual funds score higher than equity mutual funds<\/strong><\/i>.\n<ul>\n<li>For instance, when the market falls, the Net Asset Value (NAVs) of your equity funds fall sharply, whereas in case of debt funds, the fall is not as sharp.<\/li>\n<\/ul>\n<\/li>\n<li>However, <i><strong>debt funds can offer only moderate returns, while equity funds, which are highly risky, offer high returns over longer time horizon<\/strong><\/i>.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>Taxation on Debt Mutual Funds<\/strong><\/h2>\n<ul>\n<li>When it comes to the taxation of debt mutual funds, the concept of <strong>indexation<\/strong> is applicable in long-term capital gains from such funds.<\/li>\n<li>You will incur a <i><strong>capital gain if the redemption value is higher than the amount you invested<\/strong><\/i>.<\/li>\n<li>Such capital gains will be considered long-term in debt mutual funds if the investment is redeemed after <strong>3 years<\/strong> (36 months) from the date of investment.<\/li>\n<li>So, for example, if you invest Rs.1 lakh in debt funds and after 4 years you redeem the fund, which amounts to Rs.1.5 lakhs, the long-term capital gain incurred is Rs. 50,000.<\/li>\n<li>On this long-term capital gain, a long-term capital gain tax is payable.<\/li>\n<li>However, the <i><strong>tax is calculated after applying for the indexation benefit<\/strong><\/i>.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>What is Indexation Benefit?<\/strong><\/h2>\n<ul>\n<li>Inflation reduces the purchasing power of money. So, <i><strong>at the time of redeeming any investment, inflation needs to be considered<\/strong><\/i>.<\/li>\n<li>For example, if you have invested Rs. 100 in Year 1 and get a return of Rs. 110 in Year 5, the return is not exactly Rs. 10.<\/li>\n<li>This is because the purchasing power of Rs. 110 would have reduced with time due to inflation.<\/li>\n<li><i><strong>Indexation benefit is applied to the investment amount to tax your returns fairly, which factors in inflation<\/strong><\/i>.<\/li>\n<li>Basically, <i><strong>indexation helps you to calculate the new value of your investment, considering inflation and also help to get real capital gain<\/strong><\/i>.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>Present Status of Indexation Benefit in Debt Mutual Funds<\/strong><\/h2>\n<ul>\n<li>Currently, in debt mutual funds, the <i><strong>long-term capital gains are taxed @20% with indexation benefit<\/strong><\/i>.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>Change Brought in Through Finance Bill 2023<\/strong><\/h2>\n<ul>\n<li>An <i><strong>amendment proposed through Finance Bill 2023 aims to remove the benefit of indexation benefit available to debt mutual funds<\/strong><\/i>.<\/li>\n<li>As per the proposed amendment, <i><strong>no benefit of indexation will be provided to debt mutual fund investment made on or after 1<sup>st<\/sup> April, 2023.<\/strong><\/i>\n<ul>\n<li>However, only those debt mutual funds will lose these benefits where equity investment in such schemes is less than 35 per cent.<\/li>\n<\/ul>\n<\/li>\n<li>From 1<sup>st<\/sup> April onwards, such funds will be taxed at income tax rates as per an individual\u2019s income.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>Impact of the Proposed Amendment<\/strong><\/h2>\n<ul>\n<li>This proposed change may have an impact on debt mutual funds as <i><strong>investors no longer have any advantage of investing in debt funds<\/strong><\/i>.<\/li>\n<li>This will also affect gold funds and international funds.\\As a result, <i><strong>bank fixed deposits will become more attractive as both debt funds and bank fixed deposits will be subject to the same taxability of maturity proceeds<\/strong><\/i>.<\/li>\n<li>Going forward, ultra-high net worth and high net worth individuals may choose to invest in safe havens like bank fixed deposits.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<hr \/>\n<h3><strong>Q1) What is the difference between debt and equity finance?<\/strong><\/h3>\n<p>With debt finance you&#8217;re required to repay the money plus interest over a set period of time, typically in monthly instalments. Equity finance, on the other hand, carries no repayment obligation, so more money can be channelled into growing your business.<\/p>\n<p>&nbsp;<\/p>\n<h3><strong>Q2)<\/strong> <strong>What do you mean by Government Securities?<\/strong><\/h3>\n<p>Government securities are investment products issued by the both central and state governments of India in the form of bonds, treasury bills, or notes.<\/p>\n<p>&nbsp;<\/p>\n<hr \/>\n<p><strong>Source:<\/strong>\u00a0<a href=\"https:\/\/indianexpress.com\/article\/business\/banking-and-finance\/ltcg-tax-benefits-on-debt-mutual-funds-to-go-from-april-1-2023-8516377\/\" target=\"_blank\" rel=\"nofollow noopener\"><u>Blow for bond markets as long-term tax benefit scrapped for debt MFs<\/u><\/a>\u00a0|\u00a0<a href=\"https:\/\/economictimes.indiatimes.com\/mf\/mf-news\/indexation-benefit-available-to-debt-mutual-funds-may-go\/articleshow\/98957945.cms\" target=\"_blank\" rel=\"nofollow noopener\"><u>Economic Times<\/u><\/a> \u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Debt mutual fund is a low-risk investment instrument.<\/p>\n","protected":false},"author":5,"featured_media":34076,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[],"class_list":{"0":"post-34075","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/34075","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=34075"}],"version-history":[{"count":0,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/34075\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/34076"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=34075"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=34075"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=34075"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}