When the Union Budget was presented in 2023, it packed a rather unpleasant surprise for many investors. It withdrew the indexation benefit available in debt funds. Simply put, indexation benefits were not available while calculating LTCG (long term capital gains) on debt funds, which began to be calculated at applicable tax rates.
The bite of inflation
Inflation and taxes began gnawing away at returns of debt mutual funds and even pulled them down in the negative territory in some instances.
In the run-up to the budget, a question on the lips of many investors and experts is whether indexation benefit will be restored on these funds?
With indexation benefit, the impact of inflation on the cost of the instrument after purchase was factored out when computing tax on the capital gains.
Bring back indexation benefits on debt mutual funds
Experts want this benefit to be restored in the budget. For one, it would help debt mutual funds become more attractive than FDs.
“The removal of indexation benefits for the cost of debt-oriented mutual funds has made investors think on considering fixed deposits (FDs) as an alternate option for investment… In order to make investments in debt oriented mutual funds an attractive investment, the Government could consider bringing back the indexation benefit for long term capital gains from debt oriented mutual funds,” tax partner of EY India Rama Karmakar told The Economic Times.
Raising the attraction of debt funds in comparison to FDs is another argument by experts. Since FDs are safer and score higher on the liquidity factor, it is easy for an investor to choose a bank FD directly.
“The Government should bring back indexation as it helps the investor to get compensated to some extent for the loss caused by inflation which is hovering between 5 and 6.5% per annum. At the present rate of return on many debt mutual funds, the investor’s real return (after factoring inflation and tax) might turn out to be negative due to higher taxation caused by denial of indexation,” Prakash Hegde, CA argued.
Sandeep Agrawal, chartered accountant co-founder of Teamlease Regtech goes a step further and suggests that all gains from debt mutual funds should be tax-exempt since average returns from debt mutual funds are very low and close to the rate of inflation rates.
The discontinuation of indexation benefits in FY24 irked a lot of investors. Many experts think the benefit should be restored since inflation has eroded the thin margins on debt funds. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
