CA Ruby Bansal
Table of Contents
Introduction to Debt Mutual Funds
Debt mutual funds are those investments that are primarily invested in fixed-income securities such as bonds, debentures, and other money market instruments. These funds focus on generating returns through interest income and capital appreciation from bond investments.
Types of Debt Mutual Funds
There are different types of debt funds like :Overnight Funds, Liquid Funds, Floating Rate Funds, Ultra-Short Duration Funds, Low Duration Fund, Short Duration Funds, Medium-to-Long Duration Funds, Long Duration Funds, Corporate Bond Funds, Banking & PSU Funds.
How debt mutual funds are taxed?
Let us know how taxability changed after the amendment:
Taxation of Debt Mutual Funds Before April 2023
- Gains which are arise from assets held for up to 36 months were treated as short-term capital gains and taxed at applicable slab rates.
- Gains from assets which are held for more than 36 months were considered long-term capital gains. Long-term capital gains were taxed at a flat rate after indexation.
For example,
Mr. Rajesh Sharma invested in a debt mutual fund Rs. 20,00,000 in FY 2019-20 .
He sold the same in FY 2023-24 for Rs. 30,00,000, resulting in a capital gain of Rs.10,00,000.
| Particulars | Cost Inflation Index (CII) | Amount (Rs.) |
| Investment Made in FY 2019-20 | 289 | 20,00,000 |
| Sold in FY 2023-24 | 348 | 30,00,000 |
| Less: Indexed Cost of Investment | (20,00,000*348/289) | 2408304 |
| Long-term capital gain | (30,00,000 - 2408304) | 5,91,696 |
| Tax Payable | 20% | 1,18,339 |
Taxation of Debt Mutual Funds After April 2023:
- Now, availability of indexation benefits are no longer avail for calculating long-term capital gains.
- Long-term capital gains from debt mutual funds are now taxed at applicable slab rates, similar to short-term capital gains.
For example,
Mr. Rajesh Sharma invested in a debt mutual fund Rs. 20,00,000 in FY 2019-20 .
He sold the same in FY 2023-24 for Rs. 30,00,000, resulting in a capital gain of Rs.10,00,000.
From Financial Year 2023-24,
| Particulars | Amount (Rs.) |
| Sold in FY 2027-28 | 30,00,000 |
| Less : Investment Made in FY 2023-24 | 20,00,000 |
| Short-term capital gain | 10,00,000 |
|
Tax Payable - Assuming falling in: 30% tax bracket 20% tax bracket 10% tax bracket |
- 3,00,000 2,00,000 1,00,000 |
How dividends received from debt mutual funds are taxed
From 1 April 2020, dividends received from debt mutual funds are taxable in the hands of the investor/shareholder. Now, investors need to include the dividend income in their taxable income and pay tax according to their applicable income tax slab rates.
For example, if an investor falls under the 20% income tax bracket and receives a dividend of ₹10,000 from a debt mutual fund, the dividend will be added to their taxable income, and they will have to pay ₹2,000 (₹10,000 x 0.20) as tax on the dividend.
Additionally, if the dividend received exceeds ₹5,000 during the FY 2023-24, the mutual fund scheme is required to deduct 10% TDS under section 194K of the Income Tax Act, 1961
Tax-Efficient Strategies for Debt Mutual while investing
Investment in tax-saving debt funds (such as ELSS funds) helps to benefit from the tax deduction under Section 80C of the Income Tax Act.
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