Capital gains on debt mutual funds - What does this mean to you as a debt fund investor?

Ms. Vidya Bala, Head - Mutual Funds Research, FundsIndia.com

Thus far, debt mutual funds held for more than 1 year qualify for indexation as long term capital gain. This time frame is now increased to 36 months. That means you will have to hold debt mutual funds for 3 years to enjoy indexation benefits.

Also, currently the tax on debt mutual funds is 10% without indexation or 20% with indexation. The 10% option is proposed to be withdrawn. You will still have the 20% with indexation option. This change is effective for sale or redemption of funds made from April 1, 2015.

- For those who have been investing in liquid or ultra-short-term funds with a less than 1 year view nothing changes as the tax status of 'short-term capital gain' remains.

- For those who invest in debt income funds as part of their asset allocation for their long term (over 3 years), no harm done, as you will continue to benefit from indexation. In fact inflation indexation in the last 3 years was so high (9.2% annualised in the last 3 years) that you would not have paid almost nil tax on most of your debt fund investments.

- It is only those with a 1-3 year view in debt mutual funds who need to be aware of the loss of indexation benefit. Even there, in a falling interest rate market, the returns in this segment could still beat traditional options such as fixed deposits, as the price rally can generate superior capital appreciation.

Source : Equity Bulls

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