Debt Mutual Funds purchased after 1st April 2023 will not get the benefit of long term capital gains tax, regardless of holding period.
Earlier, if you redeemed a debt fund after 3 years, you were taxed at 20% with the benefit of indexation.
Despite this new provision, debt funds continue to enjoy some big advantages over fixed deposits:
- No TDS on debt funds
- FDs have Tax deducted at source or TDS
- Debt Fund More flexible than FDs. If you want to withdraw a smaller amount you need to break the whole FD But not in case of debt funds .
- No tax till you actually redeem the debt fund
- Set off , carry forward of gains & losses
- In case of debt mutual funds, you can invest and withdraw any amount on any business day , not possible in FD.
Debt funds in the provision are defined as those with less than 35% in domestic stocks. So hybrid funds with some equity exposure (above 35%) will continue to get the benefit of long term capital gains tax.
For all of these reasons, the case for debt mutual funds is STILL strong .