What The Experts Say On Scrapping Of Long-term Tax Benefit For Debt Mfs?

In emails to Goodreturns.in, experts analysed the impact of scrapping the long-term tax benefit on debt mutual funds if they invest less than 35 per cent of their assets in equities. Such mutual funds will attract short term capital gains tax. Here are what some experts say.

Axis Mutual Fund

With this change debt funds & traditional investments will now see parity in taxation. The comparison between such opportunities will rest largely on performance. One caveat for existing investors through this news flow remains, that of existing investments in debt funds, international funds and gold funds, and even new investments made in them until March 31, 2023, will not be affected by the proposed amendments. These investments will continue to attract long-term capital gains taxation once they complete 3 years. Investors could revisit their portfolio and reallocate funds towards debt and global funds to optimize their portfolios.

Sandeep Bagla, CEO Trust Mutual Funds

Last 1-2 years, MF have seen outflows from debt schemes, in spite of the tax benefit. The only segment that saw inflows was the the spate of target maturity funds which were passively holding Gsecs, mimicking FDs but with tax benefits. Investors may be reluctant to redeem even after completion of 3 years now as incremental income from these investments may remain tax efficient. Few investors may remain invested wanting to defer tax as tax is payable only at redemption. Incremental inflows will come into funds who are able to manage their portfolios actively and generate inflation beating returns for investors. There is likely to be no impact in the short term but could impact the ability of mutual funds to attract debt flows in the long term

Gautam Kalia, Senior VP at Sharekhan by BNP Paribas

With the tax arbitrage gone, Retail investors will stick to Fixed Deposits over Debt Funds. The potential for MTM gains at the cost of higher market and credit risk is just not enough of a premium for investors. They might as well stick to Hybrid or Equity schemes for their riskier allocations.

Punit Shah, Partner, Dhruva Advisors

The amendment of taxing only the upside over and above the cost of the units, where no redemption is involved, is a welcome move. However, it would have been more appropriate to tax such gain as capital gain rather than ordinary income".