No LTCG benefits on debt mutual funds from April 1, 2023

Let’s talk about some breaking news in the world of finance! Amendment to Finance Bill 2023 has scrapped the indexation benefit for gains from debt mutual funds and they will be taxed at investor’s slab rates. The suddenness of this rule change, which was passed as an amendment to the Finance Bill, has come as a surprise to many investors and financial experts. This move is expected to hurt the mutual fund industry, the corporate bond market, and investors who will be forced to pay higher taxes on their investments. The government may also be hurting itself by doing this as it launched the Bharat Bond Fund in 2019 to allow investors to finance public projects through bond investments.

Effective 1st April 2023, debt mutual funds with only around 35% equity exposure are going to be taxed differently from now on. They will be taxed at the investor’s slab rates and are now considered as short-term capital gains. What does that mean? Well, it means that the investments you make in debt mutual funds won’t enjoy the indexation benefit (a.k.a inflation adjustment) anymore. 

Debt Mutual Fund Taxation from 1st April 2023
Equity Exposure to Indian stocks, ETFs and equity-oriented mutual funds  0-35% 36%-64% 65% and more
Fund Types
  • All debt funds
  • Gold ETF
  • Multi-asset funds
  • Conservative hybrid fund
  • International FoF
  • Balanced Hybrid Funds
  • Equity funds
  • Aggressive hybrid fund
  • Balanced advantage funds
  • Arbitrage funds
Short-term capital gain As per your tax slab  As per your tax slab
(less than 3 years)
(less than 1 year)
Long-term capital gain As per your tax slab 20% with indexation
(more than 3 years)
10% on gains more than Rs 1 lakh
(more than 1 year)

In the past, if you had made a fixed deposit of Rs 1 lakh in a bank with an interest rate of 7%, you would have had to pay tax on the interest income every year based on your slab rate. But, if you had invested that same Rs 1 lakh in a mutual fund and held it for over three years, the profit on sale would be considered as capital gains and would only be subject to tax in the year of sale. Unlike fixed deposits, which are taxed every year as ‘income from other sources’. Plus, the gains from mutual funds were adjusted for inflation using a process called indexation.

Let’s break it down for you with an example!

Assuming you invest Rs 1 lakh in both options, each providing a 7% return. Let’s examine the tax implications for both incomes if you fall under the 30% tax bracket: 

Particulars Investment in FD Investment in Debt Mutual Fund 
Tax 7%*30% = 2.1 (7%-5%)*20%= 0.40

Here, the return will be adjusted for 5% inflation. Only 2% will be taxed
Effective Return 4.9% 6.60%

The post-tax return from FDs does not even beat the inflation rate of 5% in our example. Which means you lose money when you invest in FDs.

With the recent developments, it may seem like the debt funds are now on equal footing with fixed deposits but there are still many reasons why debt funds can be a great investment option: 

  • Unlike FDs, debt mutual funds are taxed only when you sell the investments. Therefore, it can be a great tax deferral vehicle.
  • Flexi FDs provide the flexibility to withdraw funds without penalty. However, if you opt for regular FDs, you’ll have to pay an early withdrawal penalty regardless of the investment period. But in the case of debt funds, once a certain period has elapsed, there is no exit load. Therefore, debt funds offer greater liquidity and can be more cost-effective than Bank FDs.
  • The returns from debt funds are higher than FD returns (7% was just an example we considered for simple explanation).
  • Debt mutual funds treat gains as capital gains, while FDs categorise them as income from other sources. This means that in case of loss in debt mutual funds, you can carry them forward and offset it against gains. Unfortunately, this option is not available for FDs.

For any clarifications/feedback on the topic, please contact the writer at

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