New Debt Mutual Funds Taxation Rules from 1-Apr-2023

Govt of India has amended finance bill 2023 now and made changes on debt mutual funds taxation which is effective from 1st April, 2023. Earlier debt funds used to get indexation benefits which would be lost with this move. What are the new debt mutual funds taxation rules from Apr-2023? Would these rules affect the capital gains from existing debt mutual funds?

Also Read: 5 Equity funds with high returns in last 1 year

New Taxation rules for Debt Mutual Funds from 1-Apr-2023

Let us classify the mutual funds for better understanding in 3 buckets i.e. funds that invest in equity above 65%, 65% to 35% and < 35%.

> 65% of equity exposure – No change in mutual fund taxation rules

65% to 35% of equity exposure – No change in mutual funds taxation

< 35% of equity exposure – This is big change here. Any mutual fund which invests for less than 35% in equity is classified under non equity mutual fund and no indexation benefits available here with the new change. For all long term capital gains (LTCG) or short term capital gains (STCG), investors need to pay income tax based on the income tax slab applicable to them.

New Debt Mutual Funds Taxation Rules from 1-Apr-2023

Would this new rule affect existing mutual funds?

These new taxation rules are effective from 1st April, 2023. Means any fresh investment in debt mutual funds after this date, new taxation rules would apply.

Some mutual funds purchased before 1st April, 2023 should be ideally grandfathered i.e. The capital gains would be taxed as per old method.

Would this new rule affect only debt mutual funds?

Beyond the debt mutual funds, this change would also affect returns from gold mutual funds and international mutual funds since these mutual funds also would fall into < 35% equity exposure bucket.

Also Read: 5 Debt mutual funds with highest SIP Returns in last 10 years

Should you stop investing in new debt funds now?

While it is surprise move from Govt of India, till this new taxation rule is passed in parliament, one should not conclude anything on this.

Also, AMC / mutual fund houses need to align existing mutual funds or new mutual funds to this rule so that it is easy for investors to understand tax implications.

In some cases AMC or mutual fund houses might increase arbitrage exposure to 35% and above in a mutual fund scheme so that it would fall in equity mutual funds segment which would continue to benefit indexation benefits.  Till such time, investors can hold making any fresh investments into the debt mutual funds.

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Suresh KP


  1. SIR

    Very informative. I have one querry. am doing SIP in Motilaloswal nasdaq fund of fund. will it come under debt category since the investments made in international stocks,

    1. Though international mutual funds in India provide access to global equities, they are taxed like domestic debt or fixed income funds. Investments for less than a three-year period are classified as STCG and more than this is LTCG

  2. Not able to understand that where the equity portion is less than/equal to 35%, then, per force, the balance 65% has to be from debt/debt related papers, and in that case, the rules governing debt should be applicable. And not a new set of rules equating such scheme with FDs. What is the logic behind this change, not able to understand. And why to bring such drastic tax change in the forthcoming election year.

    1. Its surprising move by govt of India. We already have too much complication in computing capital gains from various assets and this would add further.

      Coming to your point
      1) All debt funds mostly fall in this category
      2) There are some hybrid funds which invests < 35% in equity. As an example Parag Parikh Conservative Hybrid fund that currently invests 13% in equity would also fall in this category. AMC need to classify this properly under debt segment for capital gains purpose to avoid confusion to investors

    1. This depends on the risk. I am personally investing now in corporate bond funds (that comes with some risk). I am also investing some portion in ultra short term funds which are relatively lower risk compared to other category of debt funds.

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