Debt MF rule changes: Bharat bonds will become less attractive, say experts

Mutual fund investments where not more than 35 percent is invested in equity shares of Indian companies will now be deemed to be short-term capital gains. This is a big setback for debt mutual funds that the government has proposed in Finance Bill which has now been passed in the Lok Sabha.

Sudhir Kapadia, Partner, Tax & Regulatory Services, EY India in an interaction with CNBC-TV18 stated that this proposal should have come in the Budget proposals and will impact target maturity funds, especially Bharat Bonds.

As these funds invest in debt instruments, they may not be able to maintain the required 35 percent AUM in domestic equity, leading to the loss of indexation benefit.

Kapadia said, “Thinking about Bharat Bond, now prospectively if these changes were to be about to be carried out, even investments in such target maturity funds, which are essentially for mobilization of debt for the public sector will get impacted, adversely impacted. So, I am just wondering whether you know, as a policy measure, this is the right one when it comes to deepening the debt market for investors because that was the original objective behind for example, Bharat Bond.”

He added that a lot of the private sector mutual funds have come out with their own versions of passive index target maturity funds, which will also get seriously impacted.

Kapadia mentioned that corporates park short-term funds even today in liquid or market instruments, which are taxable at normal rates. So, from a corporate perspective, it would be tax neutral vis-à-vis short-term parking of funds with banks, or liquid funds and the like.

Kuldip Kumar, Tax Consultant & Former National Leader-Global Mobility Practice, PwC stated that the government wanted the debt mutual fund to be at par with FD.

He said, “The government probably wanted to bring that product at par with the fixed deposit because the banks are not getting the deposits. So, I think that now, these investments in such mutual funds will become at par with a fixed deposit.”

He emphasized that for the last few years’ government approach has been to tax the high net worth individuals. He said, “Whether it was taxing the contribution to the provident fund exceeding 2.50 lakh or the other measures, so I think this was one of the ways where the highlight was that high net worth individuals were using that route to save some taxes so, that has been plugged.”