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HomeBusinessCentre drops tax benefits for debt MFs in boon for banks

Centre drops tax benefits for debt MFs in boon for banks


The government’s decision to tax gains in debt mutual fund investments as short-term capital gains from 1 April would put them on par with bank deposits, a move that somewhat benefits deposit-starved lenders, experts said. “Existing investment in debt mutual funds till 31 March is grandfathered. There will be no impact on existing investments, and from 1 April, investments in debt funds will not be eligible for long-term capital gains (LTCG) benefits,” said Nilesh Shah, group president and managing director, Kotak AMC.

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All the other benefits of debt mutual funds, like diversification and professional management, will continue, said Shah. According to the finance bill, from 1 April, investors in debt mutual funds would no longer be able to avail of the long-term capital gains tax benefit despite remaining invested over three years. Before the amendment, such investments were taxed at 20% after indexation.

Indexation refers to adjusting the cost of a fund by accommodating the inflationary price changes in the redemption cost. Brokerage CLSA believes the changes are negative for the mutual fund industry with non-liquid debt assets under management (AUMs) of ₹ 8 trillion — 19% of AUMs – as the relative attractiveness due to tax arbitrage goes away. Meanwhile, liquid mutual funds of ₹ 6.

6 trillion will not be impacted as they are a short-term product, and there is no material change in tax attractiveness. “For asset management companies under our coverage, revenue contribution from non-liquid debt products is 11-14%. We believe this is moderate to low impact as the bulk of the revenue and profitability for AMCs accrues from equity AUMs, and non-liquid debt AUMs are neither higher growth nor higher profitability segments,” it said in a report on Friday.

The amendment bodes well for local banks trying to convince customers to park their funds in fixed deposits. As a result of the liquidity flush on account of the Reserve Bank of India’s (RBI) easy money policy during covid-19, banks were reluctant to hike deposit rates. Lenders finally had to change their stance once credit growth continued to outpace deposit growth, and RBI started a gradual withdrawal of liquidity to contain a runaway price rise.

“The latest tax proposals will remove the advantage debt MFs have over bank fixed deposits and end the tax arbitrage that existed. So, some retail investors will move money to bank FDs,” Suresh Ganapathy, head of financials research at Macquarie Capital, said in a note on Friday. The proposed changes in debt fund taxation, also applicable to gold funds, international funds, and domestic fund of funds, will have far-reaching consequences, said V.

K. Vijayakumar, chief investment strategist at Geojit Financial Services. “When the short-term capital gain is imposed on debt funds, the taxation will become similar to that of bank FDs.

This is a blow to the debt market. ” The impact from 1 April would be felt in asset allocation decisions and by investors in these schemes taking higher risks in the race for higher returns. Also, inflows to bank fixed deposits, equity mutual funds and hybrid funds with above 35% investment in equities and sovereign gold bonds will increase.

Since investments up to the end of the current fiscal year (31 March) will be grandfathered, investors have a small window to invest in debt and international funds to become part of the existing schemes. MINT PREMIUM See All Premium Mint Explainer: How Netanyahu’s judicial changes are di . .

. Premium Budget delivers a last-minute blow to debt investors Premium America may be a step closer to banning TikTok Premium The truth about who really pays 90% of GST collected “The change in debt taxation would meaningfully impact allocation decision,” said Roopali Prabhu, chief investment officer and executive director (private wealth group), JM Financial. Prabhu said that for the same expected return, investors would have to take a higher risk.

“Assuming an investor targets post-tax return of 7% per annum over three years, that is currently achievable by investing 100% in a target maturity fund that invested in AAA papers. Assuming yields do not change, the investor will have to invest over 25% in equities (assuming a 13% equity return) to achieve the same target return. ” ABOUT THE AUTHOR Shayan Ghosh Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks.

He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.

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