December 15, 2023

Taxation Of Debt Mutual Funds

Taxation Of Debt Mutual Funds

The taxation of debt mutual funds in India is determined by the type of income earned (capital gains or dividend income) and the holding period (short-term or long-term). The taxation laws are subject to changes in the annual budget, making it essential for investors to stay updated with the latest norms. 

Contents:

How Are Debt Mutual Funds Taxed?

Debt mutual funds in India are taxed based on income type and holding duration. If sold within 3 years, the gains are Short Term Capital Gains (STCG) and taxed per the investor’s tax slab. If sold after 3 years, they’re Long Term Capital Gains (LTCG) and taxed at 20% with indexation benefits.

Let’s consider an example. If an investor falls under the 30% tax bracket and sells the units of their debt fund within a year, the gains would be taxed at 30%. However, if they hold it for over three years, the gains would be taxed at 20% post-indexation. With Alice Blue, you can invest in debt funds and enjoy the tax advantages that come along with it.

Taxation Of Debt Mutual Funds – Before 1 April 2023

Before 1 April 2023, debt mutual fund taxation in India was based on a holding period. Short-Term Capital Gains (STCG), made from selling units within 3 years, were taxed as per the investor’s income tax slab. Long-Term Capital Gains (LTCG) from selling units after 3 years were taxed at 20% with indexation benefits, adjusting for inflation’s effect on the gains.

Taxation Of Debt Mutual Funds – After 1 April 2023

From 1 April 2023, India’s debt mutual fund taxation changed; the long-term holding period is now 40 months, up from 36. If units are sold after 40 months, gains are taxed as Long-Term Capital Gains (LTCG) at 20% with indexation. Sales within 40 months are considered Short-Term Capital Gains (STCG) and taxed per the investor’s income tax slab.

For example, if Mr. Sharma invested in a debt fund in May 2023 and plans to redeem his units in August 2026, his gains will be taxed as LTCG at 20% with indexation. In contrast, if he decides to redeem his units in April 2026, his gains will be treated as STCG and taxed as per his income tax slab.

Tax Benefit On Debt Mutual Fund

One of the significant tax advantages of investing in debt mutual funds is the availability of indexation benefits on LTCG. Indexation adjusts the purchase price of the mutual fund units with inflation, thereby reducing the amount of capital gain and, consequently, the tax on it. 

Let’s say an investor bought units in a debt fund for Rs. 1,00,000 in 2020 and sold them for Rs. 1,50,000 in 2024. The inflation index for 2020 is 289, and for 2024 is 322. Using the indexation formula, the inflation-adjusted acquisition cost would be higher than the actual cost, reducing the capital gain and tax liability.

Don’t worry about changing taxation rules! Start your investment journey now with Alice Blue by investing in debt mutual funds. 

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Taxation Of Debt Mutual Funds – Quick Summary

  • Taxation of debt mutual funds depends on the type of income (capital gains or dividends) and the holding period (short or long-term).
  • Before 1 April 2023 in India, Short-Term Capital Gains from debt mutual funds sold within 3 years were taxed based on income tax slab, while Long-Term Capital Gains from units sold after 3 years were taxed at 20% with indexation.
  • From 1 April 2023 in India, the long-term holding period for debt mutual funds increased to 40 months. Units sold after this are taxed as LTCG at 20% with indexation, while those sold within are taxed as STCG based on the income tax slab.
  • Indexation benefit, which adjusts the purchase price with inflation, is available for long-term capital gains, reducing the taxable amount.

Taxation Of Debt Mutual Funds – Frequently Asked Questions

1. How Are Debt Mutual Funds Taxed?

Debt mutual funds are taxed based on the income type (capital gains or dividends) and the holding period. Short-term capital gains (units held for less than 40 months) are taxed as per the investor’s income tax slab. Long-term capital gains (units held for more than 40 months) are taxed at 20% with the benefit of indexation.

2. What are the new rules for debt fund taxation?

From April 1, 2023, the holding period for considering a debt mutual fund as a long-term capital asset increased from 36 months to 40 months. Consequently, if the units are held for more than 40 months, the gains will be treated as long-term capital gains and taxed at 20% with indexation.

3. Is TDS deducted on debt mutual funds?

No, TDS is not deducted on debt mutual funds. However, the investor must disclose their mutual fund earnings and pay any taxes due when filing their income tax returns.

4. What is the taxability of dividend from debt mutual fund?

Dividends from debt mutual funds are added to the investor’s income and taxed according to their respective income tax slab rates.

5. Is the return on debt fund taxable?

Yes, the returns on debt funds are taxable. The taxation depends on the period for which the units were held and the investor’s income tax slab.

Take your understanding of mutual funds to the next level! Explore our curated collection of engaging blogs that empower your investment decisions. Click now to embark on this enriching journey!

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