Will investor interest increase again?

Major changes were made in the tax rules of debt mutual funds by Finance Minister Nirmala Sitharaman in the Budget 2023, which reduced the interest of investors. Now it is being speculated that the government may improve these rules in the upcoming budget. Tax experts and financial advisors believe that if there are changes in the tax rules of debt funds, the attractiveness of investing in these funds may increase again.

Changes in tax rules of debt funds in Budget 2023

Many rules related to capital gains tax for debt mutual funds were changed in the Union Budget 2023.

• Indexation benefit ended: Earlier, debt funds had the benefit of indexation on long-term capital gains, which reduced the tax burden.
• the new order: Now the profits from debt funds are added to the personal income of the investor.
• The difference between long and short term ends: Earlier, depending on the investment period, capital gains were divided into short term and long term, but this distinction has been abolished in the new rule.

The new rules came into effect from April 1, 2023 and had a direct impact on the priorities of investors.

How are debt funds taxed now?

The tax regime on debt funds is now based on normal income tax rates:

• Investment Period Ineffective: Whether the investor sells the fund before one year or after several years, there is no relief in tax slab.
• Individual tax slabs applicable: Profits from the fund are added to the investor’s total income, and taxed accordingly.
• Higher tax rate: This rule has become inconvenient for high income group investors, as they have to pay tax rates up to 30%.

Why is there a need to change the rules?

1. Promote long-term investment

The government generally encourages long-term investments. But the current rules on debt funds are to the contrary.

• Long-term investors have suffered losses due to the loss of indexation benefits on long-term capital gains.
• Experts suggest that long-term capital gains tax be fixed at 12.5%, as is applicable on other assets.

2. Benefits of debt funds

Debt funds are often considered a safe option for stable returns and risk management.

• Reforms in tax rules will encourage investors to keep a part of their portfolio in debt funds.

3. Resurgence of investment

If tax rules are made simple and incentivizing, investors from high income groups can also turn to debt funds.

Impact on debt funds after Budget 2023

Debt mutual funds declined in popularity due to Budget 2023 rules.

• Investors’ concerns: The new rules made debt funds less attractive for investors in higher tax slabs.
• Stance of options: Many investors preferred other investment options, such as equity funds and bank FDs, over debt funds.

Possible changes to increase investment in debt funds

1. Withdrawal of indexation benefits

If the benefits of indexation are reintroduced, long-term investors will be attracted towards debt funds.

2. Long-term capital gains tax cut

Like other assets, there is a demand to increase the long-term capital gains tax on debt funds to 12.5%.

3. Clear rules

It is important to make tax rules simple and easy to understand for investors.

Impact of tax on investment in debt funds

Current Status:

• Under the new tax regime, annual income above ₹15 lakh is taxed at 30%.
• Even in the old tax slab, 30% tax is applicable on income above ₹10 lakh.

potential benefits:

• With the change in rules, high income group investors can also make debt funds a part of their portfolio.
• Increase in profits as per tax slab will increase the number of investors.

Keeping an eye on the future of debt funds

If Finance Minister Nirmala Sitharaman reforms the tax rules of debt mutual funds in the upcoming budget, it will be a positive step for the market.

• Long term investment will get a boost.
• New energy will come in the fund management industry.
• Investors will get an opportunity to maintain stability in their portfolio.