The change in the capital gains tax levied on debt mutual funds has resulted in a fair amount of ambiguity over when it is to be effective. In fact, a number of readers have written in addressing that very issue.
According to Business Standard, Revenue Secretary Shaktikanta Das has stated that the effective date of the increase in long-term capital gains tax on debt mutual funds is April 1, 2014. He went on to state that the new tax rate “would apply to income arising out of this source in 2014-15, for which the assessment year would be 2015-16." If an individual has already paid advance tax, the Central Board of Direct Taxes, or CBDT, would issue a circular to clarify the tax change separately once the Finance Bill has been passed.
He was also quoted elsewhere suggesting that investors in debt mutual funds might not have to pay taxes retrospectively for units redeemed before this year’s Budget was presented.
In a move that caught the industry by surprise, Finance Minister Arun Jaitley increased long-term capital gains tax on debt mutual funds from 10% to 20%, while the holding period also going up from 12 to 36 months.
The Union Budget strategy report stated that the long-term capital gain arising on transfer of a unit of a debt mutual fund shall be chargeable to tax at the rate of 20% after allowing indexation, instead of 10% without indexation.
That means the tax break for long-term capital gains will happen only on 3-year holdings. So if you sell before this period, you are liable for short-term capital gains tax, which is taxed at your income level.
This move will hit debt fund investors who have a shorter investment time frame as well as investors who opted for 1- and 2-year fixed maturity plans, or FMPs. In fact, The Economic Times today reported that at least four fund houses are deferring their forthcoming issues of FMPs.
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