Govt may deal a tax blow to debt mutual funds; AMC stocks under pressure

If the proposed amendment to the Finance Bill gets cleared, investments across durations will be taxed as STCG

Abhishek Kumar Mumbai
Indian MF industry scaled an all-time high of Rs 35.31 trillion of net AUM as on July 2021 against Rs 31.42 trillion at the end of the last fiscal.

In a move to remove the tax advantage enjoyed by debt mutual funds over bank fixed deposits, the government has proposed to tax gains arising from debt MFs at the investor's slab rate, irrespective of the investment period.
Shares of asset management companies (AMCs) witnessed sell-off pressure in early trade. HDFC AMC was trading almost 4 per cent lower at 9.15 am.UTI AMC and Aditya Birla Sun Life AMC were down almost 2 per cent. Nippon AMC was trading 1 per cent lower.

At present, debt fund investments of over three years qualify for long-term capital gains tax (LTCG). This means that gains are taxed at 20 per cent with indexation benefits. Investments of less than three years qualify for short-term gains tax (STCG) and the investor has to pay tax at his slab rate.
If the proposed amendment to the Finance Bill gets cleared, investments across durations will be taxed as STCG. This implies that all gains will be taxed at the investor's slab rate and there will be no indexation benefits. This is in line with the tax structure of bank FDs.

The amendment has also proposed to remove LTCG taxation for gold ETFs and international funds, which have the same tax structure as debt schemes at present.
Since the returns of bank FDs and debt funds are often similar, tax advantage of debt MFs proved to be a key attraction for investors in the higher tax slabs.

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The move has left the MF industry worried.
"I hope the proposed change in the Finance Bill to remove LTCG with indexation status on debt funds is reviewed. Financialization is just happening in India and a vibrant corporate bond market needs a strong debt MF ecosystem.The success of a program like Bharat Bond and target maturity funds in the last year was just the beginning of what could have been a lot of innovation in the bond category," said Radhika Gupta, managing director and chief executive officer at Edelweiss MF.

The industry manages over Rs 13 trillion in debt schemes, which is 32 per cent of the total assets under management.

First Published: Mar 24 2023 | 10:00 AM IST

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