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Debt PMS have become more attractive than debt funds post the announcement of new tax rules in the recent budget, believe industry experts.
According to the new tax rules, while debt funds will be taxed at marginal rates irrespective of holding period, any mark to market gains from debt PMS will be taxed at LTCG rates of 12.5% after 12 months as PMSs invest directly in listed bonds from investors' accounts.
However, the accrual part in debt PMS will continue to attract tax at marginal rates irrespective of the holding period.
Debt instruments carry two components of returns - mark to market changes due to increase or decrease in interest rates and accrual, which is the interest component on the principal investments.
Simply put, both the components will be taxed at marginal rates in mutual funds whereas the first component in PMS benefits by the new tax rules.
Kunal Singh Kochar, Executive Vice President & Head – Fixed Income, PhillipCapital (India) believes that the shift towards debt PMS has already started. He said, “More investors with a bigger ticket size are investing in debt PMS compared to debt funds. Market linked debentures (MLDs) are also taxed like debt funds. As a result, they are moving towards debt PMS.”
Vijay Choudhary, Director, Renaissance Investment Managers said that the move will shift debt MF assets of HNIs to debt PMSs due to tax benefits as they will have to pay 12.5% after a year as against over 33% in debt funds.
Deepak Jaggi, Co-founder and MD, Satco Wealth has a different opinion. He said, “The expectation of investors in debt PMS is of regular income. The securities in which debt PMS invests are not very liquid while the debt funds have to be more liquid due to possibility of redemption. So, both spaces are different and will remain popular among investors based on their investment requirements.”
