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With the passage of the Finance Bill, tax incentives for debt mutual funds are eliminated

Beginning on April 1, investments in debt mutual funds will be subject to short-term capital gains tax, depriving investors of the long-term tax advantages that have made such investments so popular.

Investors in debt funds currently pay income tax on capital gains based on the income tax slab for a three-year holding period. These funds pay either 20% with benefits from indexation after three years or 10% without benefits.

Following the change, such gains from the transfer of units of some mutual funds will be considered short-term and subject to slab rates of taxation.

This is in addition to the market-linked debenture taxation that was initially included in the Finance Bill.

Specifically specified mutual funds are those in which not more than 35% of proceeds are invested in shares of domestic corporations. This could apply to debt mutual funds and gold ETFs where fewer than 35% of the fund’s earnings are invested in local firms.

This will put the taxation of these mutual funds on pace with that of bank deposits, which are subject to slab rates of taxation.

According to T V Somanathan, the finance secretary, the action was taken to achieve equity with instruments of a similar sort.


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