Invest before 31st March 2023, to avail better Tax Rates in these Mutual Funds

Indexation benefit on staying invested in Debt Funds, Gold ETFs, and International Funds has been removed for investments made on or after 1st April 2023. However, all investments made prior to that (that is, in the next 5 working days, uptil 31st March) will still get indexation benefits.

Hence, only 5 working days (27-31st March 2023) are now left to invest in Debt Funds, Gold ETFs, Internation Funds, Conservative Hybrid MFs to avail better tax rates and claim indexation benefit. Any investment made in these funds on or after 1st April, will get taxed as per your tax slab rate.

Backdrop - What happened?

“Invest in debt mutual funds. They are more tax-efficient than your fixed deposits.”

That is every (almost) financial expert’s sales pitch to an investor. And the conversation would go something like this.

Expert: Say you invest money in an FD that gives you 7% return. It sounds pretty good. Till its time to pay tax. Tell me, what tax slab do you fall into?

Investor: 30%. 🙁

Expert: Well, then you have to pay a 30% tax on that FD return. So effectively, you earn only 4.9%.

Investor: Yikes. That sounds bad. It doesn’t even beat inflation. I’m actually losing money!

Expert: And that’s why you should invest in a debt mutual fund. It’ll earn you a higher return than an FD. But ignore that. Let’s assume a return of 7% itself. It’ll be easier to compare. Now, if you sell this investment after 3 years, you don’t need to pay 30% tax. You pay only 20%.

Investor: That’s great.

Expert: But wait…I haven’t told you the best part yet. You don’t pay tax on the 7% return. You can make an adjustment for inflation. It’s called the ‘indexation benefit’. So if inflation is 5%, then your real gain is only 2%. You only pay tax on that tiny bit of ‘excess’ returns. If you do the maths, your actual return after tax is 6.60%!!! You beat inflation comfortably.

Investor: Wow! Sign me up already. But…are these mutual funds safe?

Expert: Okay, I know what comes to your mind when hear the words ‘mutual fund’. The disclaimer, right? The one saying “Mutual fund investments are subject to market risk. Read the offer document carefully before investing.”

Investor: Yup.

Expert: Okay, that’s a bit scary because we immediately imagine a stock market crash and our investments getting wiped out. But, not all mutual funds invest into the stock market. There are other kind of mutual funds too. Ones that don’t invest in stocks. Rather, there’s a professional fund manager who takes your money and then loans it to other companies. Or even to the government. They give it out as a form of debt. They could loan this money for a few days or a few years. So yeah, it’s not that risky..

Investor: Well, sign me up then. Debt mutual funds it is!

***

Well, 31st March 2023 is probably the last time you’ll ever hear such a conversation again.

Why’s that you ask?

Because the government, out of the blue, had just scrapped this indexation benefit that debt mutual funds enjoyed.

The government now says, “Look, we’ll give you time till the 31st of March. Whatever investments you make before then will be taxed as per the old rules. You’ll get indexation. But from April 1st onwards, any new investment will be taxed as per your slab. Whether you invest and sell it in 1 month or 10 years.”

Essentially, only 5 working days are now left to invest in Debt Funds, Gold ETFs, Internation Funds, Conservative Hybrid MFs to avail better tax rates and claim indexation benefit. Any investment made in these funds on or after 1st April, will get taxed as per your tax slab rate.