Investors may have less reason to seek out debt mutual funds, fixed maturity plans (FMP) and liquid schemes, as the Government has brought the tax treatment of these schemes on par with bank deposits. They will also need to retain the units for a longer period to claim tax benefits.Holding period raised
The holding period for debt mutual funds to qualify for long-term capital gains tax has been increased to 36 months from 12 months at present. So, units of debt funds and FMPs need to be held for three years after which you can pay long-term capital gains tax.
Gains on any sale of units before three years will be added to your income for that particular fiscal and taxed at your slab rate. So, for those falling in the 30 per cent bracket, the pinch would the maximum.
The second proposal pertains to the increase in the tax rate even for long-term capital gains, which has been doubled to 20 per cent from 10 per cent at present. So, if you were to make a total gain of 20 per cent on your debt investments held for three years, your effective gain would now be 16 per cent instead of 18 per cent, in the light of the increased taxes.Deposits for lower slabs
If you belong to the lower tax slabs, bank deposits may now make for a better long-term option than debt mutual funds. Beyond three years, debt fund gains will be taxed at 20 per cent, but on deposits you pay only 10 per cent tax.
With the tax breaks removed, debt funds would now have to deliver superior returns over bank deposits to justify investments.
After all, they are market-linked and investors need to be rewarded for taking risks which are higher than that of bank deposits.