When debating the Finance Bill in the Rajya Sabha, Finance Minister Arun Jaitley clarified that the new tax regime applicable to debt funds will not apply to investors who undertook "transaction of sale of units" between April 1 and July 10. This means they will pay long-term capital gains tax at 10%, not 20%. This new legislation will be effective from July 11, 2014 onwards.
In the Union Budget, he 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, in a knee-jerk reaction, fund houses began to defer their forthcoming issues of FMPs.
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