To eliminate the tax advantages that debt mutual funds enjoy over bank term deposits, the government proposes to receive tax benefits from debt MFs at a fixed rate for investors, regardless of the investment period.

Asset Management Corp (AMC) shares came under selling pressure in early trade. HDFC AMC was trading down nearly 4% at 9:15 am. Shares of UTI AMC and Aditya Birla Sun Life AMC fell almost 2%. Shares of Nippon AMC fell 1%.

Currently, debt fund investments older than three years qualify for long-term capital gains tax (LTCG). This means gains are taxed at 20%, with indexed gains. Investments of less than three years qualify for short-term gains tax (STCG), and the investor must pay tax at his flat rate.

If the proposed amendments to the Finance Bill are approved, investments across tenors will be taxed as STCG. All gains will be taxed at the investor’s flat tax rate, with no indexed gains. This is in line with the tax structure of Bank FD.

The amendment also proposes removing the LTCG tax on gold ETFs and international funds, which currently have the same tax structure as debt schemes.

Since returns from bank FDs and debt funds are often similar, the tax advantages of debt MFs have proven to be a key factor in attracting investors in the high-tax sector.

The move has the MF industry worried. The industry manages over Rs 13 lakh crore in debt schemes, accounting for 32% of the total assets under management.