How tax changes have transformed debt MF landscape, altered investor choice

Fund houses have launched debt-arbitrage FoFs to attract investors in higher tax brackets

The Union Budget of 2023 removed the indexation benefit on capital gains from debt mutual funds (MFs). This had a far-reaching impact not only on the category but also on investor behaviour. 

How tax rules changed 

Until March 31, 2023, gains from debt MFs held for over three years were treated as long-term capital gains (LTCG) and taxed at 20 per cent with indexation. Gains from holdings up to three years attracted tax at slab rates. 

From April 1, 2023, all gains are taxed at slab rates, regardless of holding period. Initially, units purchased on or before March 31, 2023,