An amendment to the Finance Bill proposed by the Finance Ministry will likely remove the long-term capital gain tax benefit that debt mutual fund investors currently receive.

What Happened? The amendment could wipe away significant benefits available to investors in the form of indexation on long-term capital gains.

According to the proposed amendment, debt funds “having not more than 35% invested in equity shares” would be taxed at the income tax slab level and treated as a short-term capital gain.

At present, any profits earned from debt mutual fund schemes that exceed three years are categorized as long-term and subject to a 20% tax rate with indexation benefits. The benefit of indexation is that it adjusts gains for inflation, significantly lowering the tax burden.

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This advantage has led financial advisors to recommend debt mutual funds as an investment option over fixed deposits to investors.

Why it Matters? According to an Economic Times report, the finance bill amendment is likely to be presented in parliament on Friday. The change could also include changes applicable to gold, international equity, and domestic equity fund of funds (FoFs).

These changes, if approved, will go into effect on April 1, 2023. As a result, investors who wish to benefit from these proposed changes can take advantage of them before the end of the year.

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