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Worried by the removal of the indexation benefit on long-term capital gains from debt, gold and foreign equity mutual funds? Investors have a small window of opportunity till March 31, thanks to a grandfathering clause in the amended law. If you invest before the law comes into effect on April 1, the investment will be eligible for tax benefits that exist today.
Chartered accountant Karan Batra points out that the amendment specifically says the new tax will apply to mutual fund units “acquired on or after April 1, 2023”.
“If someone buys debt funds before March 31, the investment will enjoy the indexation benefit till it is sold,” he says. If you are planning to invest in debt, gold or global funds, make sure to do so before March 31 to get the benefit of indexation and lower tax rate.
What has changed …
Right now, short-term gains from investments held for less than three years are added to the income of the investor and taxed at normal slab rates. But if the investment is held for more than three years, the gains are classified as long-term capital gains and taxed at 20% after indexation. Indexation takes into account the consumer inflation during the holding period and accordingly raises the purchase price of the asset. This in turn brings down the tax. During periods of very highinflation, the indexation benefit can reduce the effective tax significantly.
This will change from April 1, when the amendment in the law comes into effect. Like short-term gains, the long-term gains from funds with less than 35% invested in domestic stocks will be added to the income of the investors and taxed at the normal slab rate.
… And What Hasn’t
Even though the new rule has taken some of the sheen off debt funds, they still enjoy certain advantages over fixed deposits. For one, the gains from these funds can be set off against short-term and long-term capital losses on other investments. So, if you made losses in stocks or gold, you can adjust them against the gains from debt funds.
There is also no TDS in debt funds. In fixed deposits, if the interest income exceeds Rs 40,000 in a year,the bank deducts 10% TDS. A taxpayer who is not liable to pay tax will have to submit either Form 15H or 15G to escape TDS. Also, debt funds allow partial withdrawals, unlike fixed deposits where the entire investment is closed.
Chartered accountant Karan Batra points out that the amendment specifically says the new tax will apply to mutual fund units “acquired on or after April 1, 2023”.
“If someone buys debt funds before March 31, the investment will enjoy the indexation benefit till it is sold,” he says. If you are planning to invest in debt, gold or global funds, make sure to do so before March 31 to get the benefit of indexation and lower tax rate.
What has changed …
Right now, short-term gains from investments held for less than three years are added to the income of the investor and taxed at normal slab rates. But if the investment is held for more than three years, the gains are classified as long-term capital gains and taxed at 20% after indexation. Indexation takes into account the consumer inflation during the holding period and accordingly raises the purchase price of the asset. This in turn brings down the tax. During periods of very highinflation, the indexation benefit can reduce the effective tax significantly.
This will change from April 1, when the amendment in the law comes into effect. Like short-term gains, the long-term gains from funds with less than 35% invested in domestic stocks will be added to the income of the investors and taxed at the normal slab rate.
… And What Hasn’t
Even though the new rule has taken some of the sheen off debt funds, they still enjoy certain advantages over fixed deposits. For one, the gains from these funds can be set off against short-term and long-term capital losses on other investments. So, if you made losses in stocks or gold, you can adjust them against the gains from debt funds.
There is also no TDS in debt funds. In fixed deposits, if the interest income exceeds Rs 40,000 in a year,the bank deducts 10% TDS. A taxpayer who is not liable to pay tax will have to submit either Form 15H or 15G to escape TDS. Also, debt funds allow partial withdrawals, unlike fixed deposits where the entire investment is closed.
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