Changes introduced in the 2023 and 2024 budgets have hampered tax advantages for debt mutual fund investors in India, prompting industry calls for the reintroduction of indexation to boost competitiveness and attract conservative investors.
Debt mutual funds in India once offered a useful tax edge through indexation, which lifts the original purchase price for inflation before gains are calculated. The effect can be meaningful: a ₹1,00,000 investment in a debt fund in FY 2016-17, for example, would have an indexed cost of ₹1,20,076 when sold in FY 2021-22, based on the cost inflation index rising from 264 to 317. If the investment was redeemed for ₹1,50,000, the taxable gain would fall from ₹50,000 to ₹29,924.
That benefit has now largely disappeared. According to the rules changed by the Finance Act 2023, debt fund purchases made on or after April 1, 2023 are treated as short-term capital assets for tax purposes, regardless of how long they are held, and gains are taxed at the investor’s slab rate without indexation. Separately, Budget 2024 tightened the treatment for older holdings: units bought before April 1, 2023 that are sold after July 23, 2024 now attract a flat 12.5% long-term capital gains tax if held for more than 24 months, again with no indexation benefit. Investors who redeemed before July 23, 2024 were still able to use the earlier 20% rate with indexation.
The change has mattered for savers because it has narrowed the tax gap between debt funds and fixed deposits. Since the removal of indexation, industry commentary has pointed to weaker net inflows into debt schemes over the past three years, with higher-bracket investors among the hardest hit. For newer purchases, a long holding period no longer improves the tax outcome; for older units, the holding period still matters, but only up to the 24-month threshold now used for long-term treatment.
Ahead of Budget 2026, the Association of Mutual Funds in India has asked the government to restore indexation for debt mutual funds held for more than 36 months, according to reports in The Economic Times and other financial publications. AMFI’s wider 27-point wish list also seeks a separate deduction for ELSS under the new tax regime and greater tax parity for fund-of-funds investing in overseas equity funds. The industry argues that restoring indexation would make debt funds more attractive to conservative investors, including retirees, and could help channel household savings back into the corporate bond market. So far, no change has been announced.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
