Investment in mutual fund (where not more than 35% is invested in equity shares of Indian company) will now be deemed to be short-term capital gains. This applies to investments made on or after April 1, 2023:
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This means starting from April 1, 2023, investments in mutual funds where not more than 35% is invested in equity shares of Indian companies will be considered short-term capital gains. This means that if you sell your mutual fund units within 3 year of purchase (for Debt mutual funds), you will be subject to short-term capital gains tax, which is taxed at a higher rate than long-term capital gains tax.
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To give you some context, capital gains tax is a tax that is levied on the profit you earn from selling an asset, such as mutual fund units. Short-term capital gains tax is applicable if you sell your mutual fund units within 3 year of purchase, while long-term capital gains tax is applicable if you sell your mutual fund units after 3 year of purchase.
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This change only applies to mutual funds with less than 35% equity holdings, and mutual funds with higher equity holdings will continue to be subject to the existing capital gains tax rules.
Debt mutual funds held for more than 3 years will no longer enjoy indexation benefit & won’t be eligible for 20% tax rate:
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When you invest in a debt mutual fund, you are essentially lending money to the fund, which then invests in debt securities such as bonds, treasury bills, and other fixed-income instruments. When you sell your mutual fund units, you may be subject to capital gains tax on the profit you earned from your investment.
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Previously, if you held a debt mutual fund for more than 3 years, you were eligible for an indexation benefit. This means that you could adjust the purchase price of your mutual fund units for inflation, which would result in a lower capital gains tax. However, starting from April 1, 2023, this benefit will no longer be available for debt mutual funds held for more than 3 years.
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Additionally, the 20% tax rate that was previously applicable to long-term capital gains from debt mutual funds will also no longer apply. Instead, these gains will be taxed at the applicable slab rate for your income bracket. This means that if you are in a higher income bracket, you may end up paying a higher tax rate on your capital gains from debt mutual funds.
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It’s important to note that these changes only apply to debt mutual funds, and equity mutual funds will continue to enjoy the indexation benefit and the 20% tax rate for long-term capital gains.
Grandfathering not extending to market-linked debentures:
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Grandfathering provisions refer to a tax benefit that is given to investors who hold certain investments for a long period of time. Specifically, if you hold an investment for more than a certain number of years, you may be able to adjust the purchase price of your investment for inflation when calculating your capital gains tax liability. This can result in a lower tax liability, as the adjusted purchase price will be higher than the original purchase price, which will reduce the amount of capital gains that you have realized.
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Market-linked debentures are a type of investment that are linked to the performance of a market index or benchmark. Starting from April 1, 2023, the grandfathering provisions will not be extended to market-linked debentures. This means that if you sell your market-linked debentures after this date, you will not be able to take advantage of the grandfathering provisions, and will be subject to capital gains tax on the entire amount of your gains without any adjustment for inflation. It’s important to note that this change only applies to market-linked debentures, and other types of investments may still be eligible for grandfathering provisions.
Investments made till 31st March, 2023:
| Period of Investment | Taxation |
| Less than 3 Years (STCG) | · As per individual’s slab rate |
| More than 3Years (LTCG) | · 20% with Indexation benefits or,
· 10% without indexation benefit |
Investments made on or after 1st April, 2023:
| Period of Investment | Taxation |
| Less than 3 Years (STCG) | · As per individual’s slab rate |
| More than 3Years (LTCG) | · Will be considered as STCG |
STCG: Short-term Capital Gain
LTCG: Long-term Capital Gain
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