Altered Financial Opportunities Post Revised Debt Fund Tax Regulations
As of April 1, 2023, a significant change has been introduced in the taxation rules for debt mutual funds. Here's a breakdown of how the new rules affect your investments.
Debt mutual funds purchased on or after April 1, 2023
All gains from debt mutual funds purchased on or after this date are treated as short-term capital gains and taxed according to the investor's applicable income tax slab rate without any indexation benefit, regardless of the holding period.
Debt mutual funds purchased before April 1, 2023
For debt mutual funds purchased before April 1, 2023, the old rules still apply but with some changes after July 23, 2024:
- If sold before July 23, 2024, and held for more than 36 months, gains qualify as long-term capital gains and are taxed at 20% with indexation benefit.
- If sold on or after July 23, 2024, long-term capital gains will be taxed at 12.5% without indexation benefit (for units held over 2 years) and gains from units held for less than 2 years will be taxed as short-term capital gains at slab rates.
Investment Options for Debt Funds
With the new taxation rules, the choice of investment now depends on the investor's needs for short-term (less than two years), medium-term (2-4 years), or long-term (4+ years) investments.
For short-term investments (less than two years), the following debt investment options are available: fixed deposits, P2P lending, and arbitrage funds.
- Fixed deposits offer stable and low-risk returns, with government banks offering 6.8% - 7% interest rates on one- to two-year FDs. Higher interest rates can be earned on platforms like the one mentioned, with up to 7.55% offered for a two-year deposit.
- P2P lending offers up to 10.4% returns for a two-year investment, but it's riskier than FDs. P2P lending investments are spread among 100-400 verified and creditworthy borrowers to lower risk.
- Arbitrage funds are a tax-efficient option for emergency funds, with a short-term capital gains tax of 15% if withdrawn within one year. After one year, the tax on arbitrage funds is 10% only if all equity gains exceed Rs 1 lakh in a financial year.
Relevance of Debt Mutual Funds
Debt mutual funds remain relevant for a three-year investment horizon, offering liquidity and potential for better returns than FDs if interest rates fall. All profits from debt funds will now be added to the investor's income, eliminating indexation benefits and making both short-term and long-term capital gains taxed according to the income tax slab.
Allocating Your Portfolio
It's advisable to allocate 10% - 20% of your debt portfolio to P2P lending. Shield portfolios of Genius invest at least 70% in debt funds, with the remaining in a mix of equities and gold. Arbitrage funds are not a replacement for FDs but a substitute for keeping money in the bank account.
- With the introduction of new taxation rules for debt mutual funds used for short-term investments, investors now have options such as fixed deposits, P2P lending, and arbitrage funds to choose from.
- Fixed deposits, offering steady returns of 6.8% to 7% from government banks, can be a safe choice for short-term investments, with higher interest rates available on other platforms.
- Investors may also consider P2P lending, which can provide returns up to 10.4% for a two-year investment, although it carries a higher risk.
- For those who need an emergency fund, arbitrage funds, which are tax-efficient with a short-term capital gains tax of 15%, might be a suitable investment option.
