Grandfathering not extended to market-linked debentures: Here's what it means for investors

Since the provisions will be applicable from the next financial year, existing MLDs held for long-term capital gain (LTCG) benefit to be redeemed on or after April 1, 2023, will lead to higher tax outgo. No grandfathering has been introduced, which means investors will have to sell off their investments by March 31, 2023 to tap the existing benefit of a lower tax rate of LTCG, experts say.

In separate proposals, the government has said that investments in mutual funds where not more than 35 percent is invested in equity shares of Indian company will now be deemed to be short-term capital gains. This will apply to investments made on or after April 1, 2023. Also, debt funds held for more than three years will no longer enjoy indexation benefits. Additionally, they won't be eligible for a 20 percent tax rate.

As of now, debt mutual funds are treated as long-term investments if held for more than 3 years and taxed at the rate of 20 percent along with indexation benefits or 10 percent without indexation. Those with a holding period of less than 3 years are taxed according to their tax slab.

With the changes, investments in debt mutual funds will be taxed as short-term capital gains only. There will be no indexation benefit and tax at a 20 percent rate.