Presently, international mutual funds, for the purpose of taxation are treated as debt funds. Now, as the taxation of debt fund is going to change, so will the taxation of international fund as per the Finance Bill, 2023 tabled by Union Finance Minister Nirmala Sitharaman and later passed by the Lok Sabha on Friday.
In an international mutual fund, the short-term gains arising within three years are taxed at the investor’s applicable tax slab while long-term gains are taxed at 20 per cent after indexation benefits, or at 10% without indexation.
“Currently, pure International funds are taxed similarly to debt funds and enjoy indexation benefits. As per the new amendment, funds with less than 35% exposure to Indian or domestic equities will get impacted. Hence pure international funds that invest only in foreign securities will definitely get impacted and capital gains on those funds will be taxed as per the tax slab of the investor,” says Raj Mehta, Fund Manager, PPFAS Mutual Fund.
Going forward, capital gains from debt mutual funds will be classified as only short-term capital gains. The gains from international mutual funds will be added to the investor’s taxable income and taxed at a marginal tax rate. These debt mutual fund schemes will be taxed at the income tax rates applicable to the income beginning April 1, 2023.
However, only those debt mutual funds will lose this benefit if their equity investments do not exceed 35%. Debt funds also referred to as Income funds, primarily hold fixed-income securities and other debt assets.
The amendment in the Financial Bill 2023 reads “Specified mutual fund means a mutual fund by whatever name called where not more than 35 per cent of its total proceeds is invested in equity shares of the domestic companies.”