Stressing that a deep and vibrant bond market is critical to spur private investments, India’s apex mutual fund body has urged the Finance Ministry to rethink the imposition of short-term capital gains tax introduced last year on debt-oriented mutual funds with equity exposure of up to 35%.
In its proposals for the upcoming Union Budget 2024-25, the Association of Mutual Funds in India has mooted an amendment to Section 50AA of the Finance Act, 2023, to encourage retail investor participation in bond markets through such debt funds, by bringing them on par with the tax treatment for debentures and government securities. For those instruments, capital gains held for over three years are taxed at 10% without any indexation, with the holding period reduced to 12 months for listed debentures.
Before the introduction of section 50AA, such mutual fund schemes enjoyed the twin benefit of indexation and lower long-term capital gains tax rate, if held for more than 3 years. However, they are now considered as short-term capital assets irrespective of holding period.
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