[CAJobPortal Insights] Budget delivers a last-minute blow to Debt MFs

The Finance Bill induced amendment is that investments in mutual funds with up to 35% equity exposure to domestic companies, essentially debt funds, are liable to be taxed as per the investors’ income tax slab rate.

Earlier, if you had invested your money in a Debt Mutual Fund and held it for > 3 years , you could pay long-term capital gains tax rate of 20% post indexation

So if you invested Rs 100 where earned 7% for 3 years, so the principal of Rs 100 became Rs 121 on maturity

Cost Inflation Index was 289 in 2019-20 and you redeemed the debt mutual fund in 2021-22, where Cost Inflation Index was 317, your gain would be 121- 100*317/289 = 11.31 and thus tax @ 20% would be 2.26

Post tax amount = Rs 121-2.26= Rs 118.74

Now it will, like just a Fixed Deposit, be taxed at your marginal rate – so , if you fall in the highest tax bracket, you will pay 30% i.e. 21*30% = 6.3

so, your post tax amount = 121-6.3= 114.70

(ignore surcharge and cess)

So that arbitrage is gone

Will this really impact banks a lot ?

As per a CLSA report, the bank deposits’ market size is Rs180 trn vs total debt MF size of Rs8trn. So I really don’t agree with the posts that this move has been done to benefit banks so that they get more FDs  ( in the aftermath of the US banking crisis)

But yes, corporates raising funds thru MFs might move to Banks – as there would be potentially lower inflows in debt MFs

Will this impact the Commercial Papers markets – in my corporate stints , we used to raise a lot of money for 90-180 days through the CP route – that was financed by Liquid MFs and Ultra Short Duration funds.

The major impact, in my view, will be in the Fixed Maturity Plan, where for a 3 year investment, you could have taken indexation benefit and significantly 

What are your thoughts?

btw it could have been a good entry point for listed AMCs – HDFC AMC, UTI AMC,  Aditya Birla AMC and  Nippon AMC- you need to analyse what would be the impact on their AUMs and fee income , due to this policy chance

#finance #tax #bank #investments