I earn Rs 7.5 lakh annually. I have invested Rs 50,000 in debt mutual funds. After three years, will I get an indexation benefit, or will it not apply now? I haven’t paid taxes so far as I do not fall under a taxable slab. How will my investments be taxed?
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Reply by Aniruddha Bose, Chief Business Officer,FinEdge
The indexation benefit that was previously associated with debt funds was done away with since April this year. Going forward, all profits booked from debt mutual funds will be added to your income and taxed at the margin.
The taxation law for debt MFs in India has been revised for FY24. Based on the updated income tax legislation, any investments made in specified Debt MFs from April 1, 2023, will be subject to taxation at the income tax bracket corresponding to an individual's earnings at the time of redemption.
Income earned from the majority of the debt investments is typically subject to taxes at the tax rate that applies to an individual's respective earnings. As an example, if an individual’s net taxable income is under the 30 per cent tax bracket, the interest earned from various debt investments, such as Post office, bank FDs and RBI floating rate bonds, would also be taxed at 30 per cent.
For investments in specified mutual funds made until March 31, 2023, the tax applied to redemptions will be determined by the duration of the holding in the mutual fund schemes. If the holding period of the specified debt mutual funds is three years or less, the redemption will be taxed at the income tax rate applicable to the investor's income. For holdings that are kept for more than three years from the date of investment, the tax rate will be fixed at 20 per cent, with the added benefit of indexation.
Coming back to your question, since you are currently in a tax-free slab, your profits will essentially be tax-free. However, the same cannot be said about three or four years hence by when your income could go up. The tax rate that will apply to your booked profits will depend upon your tax bracket in the financial year you choose to redeem your fund. However, please do not make tax considerations the primary factor in your investment decision-making - your investment and redemption decisions should ideally be based on clearly defined financial goals, with tax efficiency being secondary.
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