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International funds will also be impacted by changes to debt tax rules because they are treated similarly to debt funds for tax purposes.
From April 1, 2023, the taxation of debt funds has changed. But, the new tax rules will not only impact debt fund investors but also investors in international funds. Overseas fund investors also need to be aware of the new tax rules impacting their investments. International funds will also be impacted after the changes to debt tax regulations because they are treated similarly to debt funds for tax purposes.
As per the new debt tax rule, purchases of debt mutual funds made on or after April 1, 2023, will be taxed as short-term capital gains at the applicable tax rates, provided that no more than 35 per cent of the debt fund’s investment is made in equity shares of domestic enterprises.
“In accordance with section 50AA of the Income Tax Act, any gain or income arising on transfer, redemption or maturity of units of such specified mutual funds (wherein not more than 35% of the total proceeds are invested in equity shares of domestic companies), acquired on or after 1 April 2023, will also be considered as short-term capital gains, and taxable at the applicable slab rate of the investor, irrespective of the period of holding.
Further, indexation benefits would not be available in case of such short-term capital gain. Such provision would come into effect from 1st April 2023 once the Finance Bill is ratified into Finance Act 2023,” says Dr Suresh Surana, Founder, RSM India.
In other words, regardless of the holding period, capital gains from debt funds, overseas funds, and gold funds will be taxed at the applicable tax rate for the individual. As a result, debt mutual funds, including those from abroad, held for more than three years will no longer benefit from indexation.
So, if your international funds have less than 35% exposure to Indian equities, they will be taxed as a debt fund. “These funds will now be taxed as short-term capital gains irrespective of their holding period. Simply put they will be taxed at your slab rate,” says Akshar Shah, Founder & CEO, Fixed.
“Finance Act 2023 has deemed all gains arising from transfer of any ‘specified mutual funds’ (with less than 35% investment in equity shares of domestic companies) as short-term capital gains. This would increase the capital gains tax rate for debt mutual funds from 10% (where the holding period is more than 36 months) to 30%/ 40%. The increased tax rate would also apply to investments in mutual funds investing in offshore securities, gold, and fund-of-fund structures. However, non-resident investors from countries where treaty benefit is available (such as Singapore, Mauritius, Ireland, etc.) can continue to avail of exemption under respective tax treaties. Further, funds set up in the IFSC will also continue to be exempt,” says Rajesh Gandhi, Partner, Deloitte India.