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FM Raises Capital Gains Tax On Debt MF

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The Union Budget has dealt a severe body blow to asset management industry by increasing long-term capital gains tax on debt funds. The Finance Minister has leveled up long-term capital gains tax on debt mutual funds to 20 per cent from the earlier 10 per cent.

Adding salt to injury, the Ministry headed by Arun Jaitley has also increased the holding period from 12 months to 36 months. This will force investors to stay invested in debt funds for a longer time-frame.

This, in effect, has removed the tax arbitrage between mutual funds and other debt products. Till now, investors had to pay only 10 per cent tax on gains from debt mutual funds. This was much lower and apparently “discriminatory” towards bank savings products and other debt instruments, where investors paid over 20 per cent capital gains tax.

By increasing tax rates, the ministry has created a level playing field between similar – and often competing products, investment experts opine.

This move, however, will impact the fund industry in a big way. Over the past one year, fund houses have been trying to bring in more retail investors into debt funds – which otherwise is considered as reserve of corporate treasuries and high networth individuals.

As on March 31, 2014, HNIs and retail investors have investments worth Rs 15611 crore in money market funds, Rs 2492 crore in gilt funds and Rs 190770 crore in debt-oriented funds.

Higher long term capital gains tax and extended holding period may prompt savvy investors to withdraw money from debt funds over the next few months.