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In a major blow to the Rs.40 lakh crore MF industry, the government has passed the finance bill 2023 in Lok Sabha in which it has done away with the indexation benefits given to debt fund investors if they hold units of such funds for over 36 months.
This brings debt funds, gold ETFs, international and FoFs in line with other fixed income products like bank FDs.
Currently, investors are taxed at a marginal rate of interest if they hold other than equity schemes (debt funds, gold ETFs, international funds and FoFs) for less than 36 months. For holding period of more than 36 months, they are allowed to avail 20% tax with indexation benefits, which essentially make them competitive vis-a-vis other fixed income products like bank FDs, national savings certificates and so on.
With the new change, investors will have to pay tax at marginal rate of taxation irrespective of their holding period.
Sandeep Bagla, CEO, Trust MF feels that the move may not have any significant impact on mutual funds. “Most of the inflows in mutual funds come in short term funds. While this tax benefit was there for the last 2-3 decades, it did not make a huge difference. However, a few categories like target maturity funds and long duration funds are likely to lose their sheen.”
Of the total debt assets of Rs.13.03 lakh crore, Rs.9.53 lakh crore or 74% of the total debt AUM is in short term funds having maturity of less than 3 years as on Feb 2023.
Srikanth Subramanian, CEO, Kotak Cherry believes that debt funds will now be sold on its merits. "For mutual fund to get investor interest, it’ll now have to purely be on their ability to add extra “risk adjusted returns” and not because of any tax arbitrage. The tax arbitrage that was available at an “instrument” level seems to be getting evened out across the board be debt MF or MLD. However, this will benefit the corporate bond market where there will be renewed interest from retail investors, and this will also add depth to the liquidity, which again will mean better pricing for the end customer."
