Debt Mutual Funds: Expectations From Budget 2025 On Tax And Yield Benefits

As the Union Budget 2025-2026 draws near, investors are worried about debt mutual funds since the current taxation system does not provide an advantage in tax benefits between them and bank deposits. The advantage of indexation has been eliminated, hence there is no longer any tax arbitrage. As of April 1, 2023, the indexation benefit for debt mutual funds was no longer available for new investments. The indexation benefit was only applicable for debt mutual fund investments placed before April 1, 23. Subsequently, the FM eliminated the indexation benefit on those investments in the July 23rd, 24 budget, lowered the holding period to two years and turned them taxed at 12.5% long-term capital gains (LTCG) without indexation.

Debt Mutual Funds Lose Tax Edge: Is It Still a Good Investment?

Debt mutual funds have lost the benefit of taxation due to the powerful banking lobby. The current regime does not allow any distinction in tax benefit vis a vis bank deposits. There is now no tax arbitrage as the benefit of indexation has been withdrawn. With effect from 1 April 2023 the benefit of indexation on debt mutual funds was completely withdrawn for fresh investments, as per Mr. Juzer Gabajiwala, Director & Company Secretary, Ventura Securities.

Debt Mutual Funds Now Taxed at 12.5% - What It Means for You?

The benefit of indexation was available only for investments in debt mutual funds made prior to 1 April, 23. Thereafter in the Budget announced on 23rd July 24, the FM withdrew even the indexation benefit on those investments and made it taxable at 12.5% ++ and reduced the holding period to 2 years. For most investors this has increased their tax liability. What has been missed out by the FM is that in a debt mutual fund, the investor is not only exposed to "interest rate risk" but also to "credit risk". That is if the interest rates in the economy goes up, the price of the security goes down, resulting in a loss and vice versa, according to Mr. Juzer Gabajiwala.

Can India Adopt Real Return Taxation? A New Approach to Fixed Income Taxes

Credit risk is the default of the issuer. The same is not applicable to an investor in bank fixed deposits as not only do the deposits have an insurance but also there have been instances where the banks have been bailed out; this is not the case with mutual funds. Even if this is not to be considered there is also a very pressing need to tax only the real return on interest I.e. the coupon rate less inflation. This would ensure that only the real income is taxed. To explain with an example. If the FD rate is 7% pa and the inflation is 5%. Tax should be levied only on 2% of the Income, stated Juzer Gabajiwala.

Better Tax Benefits = Happier Workforce: Key Expectations for Budget 2025

As Budget 2025 draws closer, we have a great opportunity to create meaningful tax relief for salaried employees especially considering their evolving financial and lifestyle needs. With the cost of living steadily climbing, financial stress has become a major factor affecting job satisfaction and overall productivity. The government can really step up here by offering tax benefits that align with what employees need to thrive today, said Sourabh Deorah, CEO & Co-Founder, AdvantageClub.ai.

"For me, one big game-changer could be expanding tax benefits under the new regime. This includes things like gym memberships, therapy, and holistic wellness services. Right now, Section 80D mostly focuses on health insurance, but it's time for a broader, more forward-thinking approach to well-being. There's solid research behind this: physically active employees are 25% more productive, and the WHO says that every $1 invested in mental health brings back $4 in improved health and productivity. Letting people claim deductions for gym memberships, yoga, counseling, and wellness programs isn't just about fitness-it's about creating long-term savings in healthcare while building a healthier, happier workforce," he added.

"Another area where we can make an immediate impact would be providing higher tax exemptions for essentials like groceries, fuel, and transportation-key expenses that are eating into household budgets, thanks to inflation going above 5-6% in India. Stability, both financial and personal, is a huge factor in employee retention. By addressing these challenges, employers and the government can create a more supportive environment for employees," Sourabh Deorah stated.

Ultimately, this budget isn't just about cutting taxes- it's about giving employees the resources to lead healthier, less stressful lives. That's a win for everyone: happier employees, higher productivity, and a stronger economy.