Govt to scrap long-term tax benefit for debt mutual funds investing less than 35% assets in equity

Debt mutual funds are likely to be stripped of the long-term tax benefit if they invest less than 35 per cent of their assets in equities. Such mutual funds (MFs) will attract short-term capital gains tax.

The government is likely to make such a proposal in the form of an amendment to the Finance Bill 2023 in the Parliament, sources said.

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The Finance Bill 2023, which contains tax proposals for the fiscal year starting April 1, is to be taken up for approval in the Lok Sabha as early as on Friday (March 24).

Amendment to Finance Bill 2023

Once the amendments to Finance Bill 2023 gets Parliament assent, holders of mutual fund schemes which invest up to 35 per cent of their assets in equity shares would be taxed as per their slab rates.

The proposal will bring parity in taxation between a market-linked debenture and a mutual fund which invests the majority of its funds in debts. The finance ministry is likely to bring in amendments to the Finance Bill 2023, removing the long-term capital gains tax (LTCG) benefits available to such specified MFs.

Currently, such mutual fund schemes attract 20 per cent LTCG with indexation benefits.

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Nangia Andersen LLP Partner Vishwas Panjiar said the Finance Bill 2023 introduced special provisions for computing capital gains in case of transfer of a market-linked debenture. This provision is now expanded to cover specified mutual funds as well, i.e., mutual funds where not more than 35 per cent proceeds are invested in equity shares of domestic companies.

“Accordingly, in all cases, irrespective of the period for which the market-linked debenture and/or the specified mutual fund is held by the holder, gains arising from the transfer will be deemed to be short-term capital gains,” Panjiar said.

(With agency inputs)