Debt Fund Tax Changes After 2023

Introduction

Until recently, long-term investors in debt funds enjoyed indexation benefits — a smart way to reduce tax on inflation-adjusted returns. But that changed in April 2023, when the tax rules were overhauled. Here's what you need to know if you invest in debt, gold, or international funds.

What Changed in April 2023?

• Debt mutual funds that invest < 35% in equity now no longer get LTCG with indexation.
• All gains, irrespective of holding period, are taxed as per slab (marginal rate).
• Applies to investments made after April 1, 2023.

• Her March investment, if held for 3+ years, will be taxed at 20% with indexation.
• Her April investment, even if held 5 years, will be taxed at her slab rate (e.g., 30%).

• All Debt Funds
• Gold ETFs, FoFs, International Funds

• Post-2023 investors may prefer fixed deposits or arbitrage funds for short durations.
• Tax alpha (via indexation) is no longer a benefit.
• Need to rethink allocation strategies for long-term goals.

 The 2023 rule change narrows the tax edge of debt mutual funds — but they still offer flexibility, diversification, and better post-tax returns than some bank options (especially for low-slab investors). 

Review your debt fund portfolio — and reallocate smartly based on your income tax slab and time horizon.

Summary Table: Debt Fund Taxation – Before & After