Taxation of Debt Oriented Mutual Funds

Introduction:

Taxation aspect of mutual funds is a very challenging thing to know as mutual funds are simply classified under two major categories in the Income Tax Act 1961 i.e., 1) Equity Oriented Mutual Funds and 2) Debt Oriented mutual funds. In this article, we are dealing with the taxation of Debt oriented mutual funds. In later posts, I will also let you know about the taxation of Equity Oriented Mutual Funds.

What is Debt Oriented Mutual Funds?

As per I.T. Act, 1961, there is no direct definition of Debt oriented Mutual Funds. But generally, these are the funds where Portfolio’s Debt exposure (means investment in Fixed income bearing securities i.e., Bonds, debentures, etc) is in excess of 65% and equity exposure is not more than 35% of the Total Portfolio (in value).

Taxation of Debt Oriented Mutual Fund:

After a major Amendment in Budget 2023, starting from 1^st April 2023, these are Taxable at slab rates/ normal rates. In short, we can say that these are deemed as Short-Term Capital Asset (STCA) irrespective of their Actual Period of Holding.  Debt oriented mutual funds will never be classified under the definition of Long-Term Capital Asset (LTCA).

For Example: Aditya Birla Corporate Bond Fund whether held for 9 months, 12 months, 18 months, 24 months, 36 months, or 40 months, in all the cases, it will be considered as STCA only.

So, any investor redeeming their MFs on or after the Current Assessment Year (AY 24-25) must keep in mind the new amendments in law.

This is a very big change made by Budget 2023 which will affect most of the retail investors in the long run. Also, this major Amendment is not also getting talk of the time.

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