Debt and short-term mutual funds are an excellent avenue for investors looking for stability and regular income from their financial portfolio. However, too many changes have happened on the taxation front into these products including the changes announced in the recent Union Budget.
The following are our thoughts on the taxation norms for debt and short-term mutual funds in India post the Union Budget 2025. It could be re-iterated that the following is our interpretation and should not be construed as Investment Advice. Readers should consult their Registered Investment Advisers and Financial Planners before building their financial portfolios.
- Arbitrage Mutual Funds: These invest in arbitrage opportunities in the equity markets and are treated as Equity Mutual Funds for taxation purposes. These schemes however behave like debt mutual funds in their Risk/Return characteristics. Capital gains tax are levied at 12.50% for gains after 1 year and 20% up to 1 year. These would be eligible under basic exemption limit of Rs 4 lakhs in the New Tax regime but not under the Rs 12 lakhs exemption. Excellent parking tools for 6 months plus time frame. Suggested schemes are -Nippon Arbitrage and ICICI Prudential Arbitrage Fund.
- Pure Debt Mutual Funds (liquid, short, medium, conservative and long-term ones): These invest predominantly in debt instruments and less than 35% in equity instruments. Strategy is to focus on wealth protection rather than growth. Capital Gains are Taxed at marginal tax rate for any time withdrawal. Would be eligible under basic exemption of Rs 4 lakhs in the new tax regime and also under the Rs 12 lakhs exemption. Taxation similar to banking products. Anyone investing in such schemes/products should do only for better returns/yields and liquidity than banking products. Ideal time from 1 day to 3 year plus depending on the portfolio. Suggested schemes – Any liquid Fund, ICICI Prudential All Seasons Bond Fund, PPFAS Conservative Hybrid Fund & SBI Constant Maturity Fund. Investments done prior to April 2023 would be taxed at 12.50% after 2 years holding period without indexation.
- Specified Mutual Funds: These invest predominantly in debt instruments and between 35% to 65% in equity instruments. Strategy is to focus on wealth protection rather than growth with some short-term volatility. Capital Gains are taxed at Marginal rate for up to 2 years exits and at 12.50% after 2 years exits. These would be eligible under basic exemption of Rs 4 lakhs in the new tax regime and also under the Rs 12 lakhs exemption for the exits within 2 years. Taxation is similar to banking products for up to 2 years exit. These products are excellent alternatives to banking products if the annual income (from salary, rental, interest etc and not capital gains) is greater than 12 lakhs and investment term is greater than 2 years. Recommended with 2 years plus investment horizon. Suggested products are PPFAS Dynamic Asset Allocation Fund & Bandhan Income Plus Arbitrage Fund.
It could be noted NRI’s would not get the basic exemption limits where there is a concessional tax rate. NRIs would be eligible for basic exemption limit of Rs 4 lakhs where the taxation is marginal tax rate.
Debt mutual funds and banking products are the foundations of any financial portfolio. One should have allocations to these instruments based on one’s risk profile and cash flow requirements. Feel free to connect to us@9845557582/ naveen@naveenrego.com for any clarifications or to know how to engage with us.
Happy Investing!!
Naveen Julian Rego- CFP
Managing Director & Principal Officer
6th Feb 2025
Disclaimer:
- Investment in the securities market is subject to market Please carefully review all relevant documentation before making an investment.
- Registration granted by SEBI, membership of BASL and certification from NISM in no way guarantees the performance of the intermediary or provides any assurance of returns to investors.
- It would be important to consult a tax practitioner before acting on any of the above tax
- Some of the above provisions might change with time.