The new debt fund tax rule will not only impact non-equity funds but also international mutual fund schemes. This is because the international funds are treated as debt funds for the purpose of taxation and they also enjoy indexation benefits till March 31, 2023. From the next financial year onwards, the debt funds with less than 35 per cent exposure to Indian equities will be taxed as per the investor’s tax slab.
What it essentially means is that the investments made in debt mutual funds including foreign funds from April 1, 2023, will not enjoy indexation benefits. The short-term gains arising within three years are added to income while the long-term gains will also be taxed as per the investor’s tax slab. Effectively, gains in debt funds on investments made on or from April 1, 2023, will be fully taxable.
“The change in the taxation of debt funds will also impact international mutual funds. The new rule will apply to all debt-oriented mutual funds, including international funds. This means that international funds will be impacted by the new taxation policy,” says CA Manish P. Hingar, Founder at Fintoo.
But, here’s why not all foreign funds get impacted by the new debt fund tax rule. “It is important to note that not all international mutual funds will be impacted by the new rule. Only those funds with less than 35% exposure in equities will be subject to the new proposed rule. If the fund has more than 35% exposure in equities, it will be treated as an equity-oriented fund, and the new tax rule for debt funds will not apply. Therefore, it is essential to examine the exposure of the international mutual fund in equities to determine whether it will be impacted by the proposed changes.”
International funds provide Indian investors to diversify their domestic portfolio with global equity exposure thus managing risks and gaining from the currency depreciation. Some international funds have 100 per cent exposure to foreign equities while some of them have limited exposure to global equities.
Raj Mehta, Fund Manager, PPFAS Mutual Fund says, “Currently, ( till March 31, 2023) pure International funds are taxed similar to debt funds and enjoy indexation benefits. As per the new amendment, funds with less than 35% exposure to Indian/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. Other categories that get impacted are Gold funds, Gold ETF’s, Fund of Funds etc.”