What are the new rules for taxing capital gains on debt mutual funds?

How is short-term capital gain or loss on debt mutual funds calculated? Is indexation used in calculation? Can both gain or loss be set-off with normal income or capital income? - Jagdish Singh

As per the amended Finance Bill, capital gains on debt mutual funds (whether short-term or long-term capital gains) will now be added to your income and taxed according to your tax slab, regardless of the holding period.

Previously, if you sold your debt fund after holding it for three years, it was taxed at 20 per cent after indexation benefit was provided. Unfortunately, the benefit of indexation is no longer applicable for investments in these funds made on or after April 1, 2023.

It's crucial to note that these new regulations will only apply to fresh investments made on or after April 1, 2023. Existing investments will not be affected by the changes.

Setting-off capital losses

• Short-term capital losses can be adjusted against both short-term and long-term capital gains under section 70 of the Income Tax Act.
• Long-term capital losses can only be adjusted against long-term capital gains.

How to know capital gains are short-term or long-term?

The holding period decides whether capital gains are categorised as short-term or long-term. For non-equity-oriented mutual funds, such as debt mutual funds,

• Gains on holdings up to three years are classified as short-term capital gains.
• If the fund is held for more than three years, the gains are classified as long-term capital gains.

If you miss setting-off your capital losses, you can carry them forward for up to eight years. This implies that this year's loss can be set-off against gains that you incur in the next year. Furthermore, old losses claimed within the last eight years can also be carried forward and set-off against the present year's gain.

Suggested read: How to set-off capital losses against the gains?