Last Chance to benefit from the change in Debt Mutual Funds Taxation


by 5paisa Research Team Last Updated: Mar 28, 2023 - 12:27 pm 666 Views
Listen icon

Naturally, we are all very concerned about how the latest norms will affect our investments. Here, a group of investors - John, Emma & Raj have gathered to discuss the recent changes in the taxation of Debt Mutual Funds.

John: Did you all hear about the recent changes in Debt Mutual Funds taxation?

Emma: Yes, I heard about it in the news! The government has proposed a change to the Finance Bill 2023 that will affect the long-term tax benefit for Debt Mutual Funds.

Raj: That's right..! And according to personal finance experts, this proposal will bring bank Fixed Deposits on-par with Debt Mutual Funds.

John: Oh! But how? 

Emma: Until now, Debt Mutual Funds offered an indexation benefit on long-term capital gains,i.e., if you held onto your investments for 3 Years! Fixed Deposits didn't offer this perk. However, starting from 1st April 2023 - Debt Mutual Funds will also no longer offer this benefit.

Let's say you invested Rs. 1,00,000 in a debt mutual fund in March 2019 and redeemed the investment in March 2022 for Rs. 1,20,000. During this period, the cost inflation index (CII) increased from 280 in 2019-20 to 317 in 2021-22.

Without indexation benefit, the capital gain would be calculated as follows:

Capital gain = Sale price - Purchase price = Rs. 1,20,000 - Rs. 1,00,000 = Rs. 20,000

However, with indexation benefit, the purchase price is adjusted based on the CII for the relevant financial years. The indexed cost of acquisition is calculated as follows:

Indexed cost of acquisition = (Purchase price x CII of year of sale) / CII of year of purchase

= (1,00,000 x 317) / 280
= Rs. 1,12,857

Therefore, the capital gain with indexation benefit would be calculated as follows:

Capital gain = Sale price - Indexed cost of acquisition

= Rs. 1,20,000 - Rs. 1,12,857
= Rs. 7,143

As you can see, the indexation benefit has significantly reduced the capital gains, and therefore, the tax liability of the investor.
Raj: Emma, wait, but what about my investments that I made before 1st April 2023?

John: This is a valid point!!

Emma: They will remain unaffected. So, the catch here is - all investments made before 31st March 2023 will enjoy the long term indexation benefit.

John: Well, we all need to evaluate our investments in Debt Mutual Funds & see how this change will impact our returns. It may be a good idea to diversify our investments and explore other options such as equity-oriented schemes. 

Raj: That's a good suggestion. Also, we can invest before 31st March 2023 & take advantage of this benefit to make the most of it.

John: I agree. Let's do our research & make informed decisions. Also, by taking advantage of this opportunity, we can enjoy the benefits of indexation by investing in Debt MFs at the moment - which inturn will help us to save on taxes!!

Emma: Right John, Debt Mutual Funds are considered one of the safest investment options out there! Let's do some research and see if they could be a good fit for us.

In conclusion, the recent changes in debt mutual funds taxation may impact investors differently. It's important to evaluate our investments & make informed decisions based on our financial goals and risk tolerance.

Key Takeaways in 6 points:

● Debt Mutual Funds are considered as low risk investments as they invest in government securities.
● Investment in these Mutual Funds for more than 3 Years is categorized as Long term Capital Gains.
● These Gains are further taxed at 20% tax rate with indexation benefit.
● Indexation helps to bring down taxes as it  accounts for inflation & this also lowers the tax payable by the investor.
● As per latest norms, all investments before 31st March 2023 will continue to enjoy the indexation benefit.
● Investors can make informed decisions based on their risk tolerance.

While Picking a good Debt Fund in a short span can be tricky, but with 5paisa's top recommended funds you can find below the funds with proven track record:

Fund Name

5Y annualised returns

(As on March 27, 2023)

Expense Ratio

SBI Magnum Gilt Fund

8.09% p.a.


ICICI Prudential Gilt Fund

7.87% p.a.


Kotak Gilt Investment

7.99% p.a.


How do you rate this blog?


Start Investing in 5 mins*

Rs. 20 Flat Per Order | 0% Brokerage


About the Author

Our research team is composed of some highly qualified research professionals, their expertise range across sectors.


Investment/Trading in securities Market is subject to market risk, past performance is not a guarantee of future performance. The risk of loss in trading and investment in Securities markets including Equites and Derivatives can be substantial.
Open Free Demat Account
Resend OTP
Please Enter OTP
Mobile No. belongs to

By proceeding, you agree to the T&C.

Latest Blogs
Weekly Outlook on Copper - 01 December 2023

Copper prices saw a modest 0.33% gain, reaching 722 on Thursday, as worries about a slowdown in Chinese manufacturing loomed large. The November's NBS Manufacturing PMI slipped to 49.4, the second consecutive monthly decline, heightened concerns, emphasizing the need for additional government support to fortify China's economic growth. The NBS Non-Manufacturing PMI at 50.2, reflecting the 11th month of service sector expansion, hinted at a softer pace.

Swing Trading Stocks: Week of 04 December 2023

Swing Trading Stocks for the Week

Weekly Market Outlook for 04 December to 08 December

Our markets started the truncated week on a positive note and it rallied higher throughout the week. The first day of the December month infact witnessed a new record as the Nifty surpassed its previous high and ended in uncharted territory above 20250 with weekly gains of almost two and a half percent.