The Government has recently changed taxation rules with respect to Specified Mutual Fund which include funds whose total exposure in equity is less than 35%.
What are Specified Mutual Funds:
– Specified Mutual Fund includes
– Debt Mutual Fund
– GOLD ETF
– International FOF
– Hybrid Fund
– Dynamic Assets Allocation Fund
– Multi Asset Fund
Tax Effect as per Existing rule and as per New rule
Let us understand the tax effect on investment made in Debt Mutual Fund on or before 31/03/2023 and tax effect on investment made in Debt Mutual Fund on or after 01/04/2023.
1. Tax applicable on or before 31/03/2023
Currently Debt Mutual Funds are divided into 2 categories
A) Short term gain will arise when you sell debt mutual funds within 36 months from the date of acquisition. Tax will be applicable as per your slab tax.
B) Long term gain will arise when you sell debt mutual funds after 36 months from the date of acquisition. Tax will be applicable @20 % after calculating indexation benefit. Here assessee will be getting 2 benefits. One is Indexation cost benefit, other is tax applicable is 20%. However this is beneficial to only those assessee that fall under 30% tax slab.
2. Tax applicable on or after 01/04/2023
• As per Finance Act if you buy Specified Mutual Fund (Debt Mutual fund) on or after 01/04/2023 it will be deemed to be calculated as Short term capital gain irrespective of your holding period. i.e You have bought a debt mutual fund on or after 01/04/2023 and sold it after 4 years, still it will be treated as short term capital gain.
- Assumed that Cost Inflation Index will Increase every year @6
- * Tax Rate consider @30 % on assumption that taxpayer is in the highest tax bracket
As we have seen in above example that tax amount will increase in New Rule introduced by government in Finance Act.
Reason for New Taxation Rule on Debt Mutual Fund
Government wants to make tax rate equivalent between Debt Mutual Fund scheme and Bank Fixed Deposit.
Debt Mutual Funds are still Attractive in comparison to Fixed Deposit
Debt Mutual Funds are still attractive as assessee has to pay tax every year on the Interest earned from Fixed Deposit. However in Debt Mutual Fund & in Specified Mutual Fund, tax will be applicable in redemption year only. Due to this assessee can postpone tax liability to any future years when income is relatively low.
Disclaimer: The Above compilations are for Educational purpose only, kindly Consult your investment advisor for your investment decision.