Debt mutual funds taxation in India: Everything you need to know
Debt mutual funds pool capital from investors to buy fixed-income instruments such as government bonds, corporate bonds, commercial papers, and other money market securities. These funds are designed to generate regular income with minimal risk and are appropriate for conservative investors or those approaching retirement.
The taxation process of debt mutual funds:
Taxation of debt mutual funds in India has changed drastically in recent years. Investors need to educate themselves on these tax implications so they can maximise their returns.
Recent taxation changes
From April 1, 2023, the taxation on debt mutual funds was revised. Debt mutual funds bought on or after this date are taxed at the applicable income slab rate, irrespective of the holding period. This means that both short-term and long-term capital gains from these funds are taxed as per the investor's income tax bracket.
Taxation in accordance with the holding period
The holding period of investments in debt mutual funds affects their taxability:
Short-term capital gains (STCG):
| Asset | Holding period | Tax on capital gains |
| Debt fund purchased before 1st April, 2023 | Up to two years | As per investor’s slab rates |
| Debt fund purchased after 1st April, 2023 | Always short term | As per investor’s slab rates. Also, you can now claim a rebate of ₹60,000 |
Long-term capital gains (LTCG)
| Asset | Holding period | Tax on capital gains |
| Debt fund purchased before 1st April, 2023 | Greater than two years | 12.5% without indexation benefits. You don’t get the benefit of a rebate, but the Budget 2025 has increased the exemption limit, which lowers your tax liability. |
| Debt fund purchased after 1st April, 2023 | Always short term | As per the investor’s applicable tax slab rates. As mentioned above, you can now claim a rebate of ₹60,000. |
Tax rebate under section 87A
Investors who have purchased debt mutual funds on or after April 1, 2023, may qualify for a tax rebate under Section 87A of the Income Tax Act. This rebate can reduce investor’s tax liability, lowering the impact of the tax rate on their capital gains.
Tax-saving strategies
Below are some tax-saving strategies for debt mutual funds:
- The holding period
Tax laws regarding the holding period help investors structure redemptions to manage their tax slabs. Holding debt mutual funds for two-plus years may result in favourable taxation if acquired before April 1, 2023.
If purchased after April 1, 2023, regardless of the holding period, gains on debt funds are charged as per the investor’s slab rate. However, investors can now claim a rebate of ₹60,000, offering some relief.
- A mutual fund returns calculator
A mutual fund returns calculator can estimate potential returns and taxation based on different holding periods and investment sizes.
Using this tool, investors can check different scenarios and make informed decisions regarding the redemption of their units.
- Diversifying portfolio
Spreading funds across various categories of debt mutual funds can assist in controlling risk while potentially optimising overall returns.
For instance, short-duration funds are ideal for moderate returns and stability, balancing liquidity and risk, whereas liquid funds ensure easy access to funds with minimal risk, ideal for short-term cash management.
Conclusion
Debt mutual funds are a popular option for investors seeking stable returns with lower risk. However, the tax implications of these funds are ever-evolving, and investors must be cautious about purchase dates and holding periods.
With knowledge of the current tax regime and the use of tools such as the mutual fund returns calculator, investors can make informed decisions to maximise their after-tax returns.
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