Budget 2024: Indexation Benefit on Debt Mutual Fund; Will it be Back?

All people are keeping their eye closely on the government’s move if it will bring back the indexation benefits for debt mutual funds in the upcoming Union Budget 2024. This topic is getting so much attention as it greatly affects investors’ actual returns. Let’s know about this in depth.

Investors can easily adjust their purchase price of debt mutual funds for inflation with the help of Indexation benefits. This will reduce the tax which investors need to pay on their profits. Long-term investors mainly benefitted from this as this boosted their returns after taxes.

The tax on profits from debt mutual funds is calculated on the total profits without considering inflation without indexation. This means, that if inflation has eaten away a big part of these profits, still the investors have to pay taxes on the full amount of these profits. This results in a negative real return for many investors.

What are Indexation Benefits?

Indexation is a technique of adjusting the cost of a capital asset to reflect inflation’s effect since its purchase. Indexation benefits were given on LTCG of the sale of debt mutual funds to make it look attractive.

Indexation benefit on debt mutual funds was eliminated by Finance Bill 2023. Currently, they are taxed at slab rates of investors.

Several recommendations are given by the Experts for the government to consider in Budget 2024:

1. Increasing Tax Benefits on Retirement Products: The government can offer more tax benefits on retirement savings products which will encourage people to invest more for their future.

2. Promoting Long-term Investments: Long-term investments can work in making the economy stable. Providing tax breaks for holding investments longer, will encourage people to invest more and grow the financial market.

3. Simplifying the Tax Rules: By making the tax rule simple for different investment products will make it easy to understand for the investors. It will reduce confusion and encourage more people to invest.

4. Financial Literacy: Bringing up programs that will teach people about finances, helping them to make better investment decisions.

Why the Government Should Bring Back Indexation Benefits?

Restoration of Indexation benefits on debt mutual funds will not only increase returns but will also restore the confidence of investors. The competition in debt mutual funds becomes less after the removal of these benefits, pushing investors towards other options that might not be good for long-term wealth generation.

The return of Indexation benefits will make debt mutual funds more suitable for those investors who are looking for stable returns with manageable taxes. Investors will get their much-needed relief from its return and will be encouraged for long-term investments. As we wait for the budget announcement, both investors and financial experts are hoping to get positive changes that will make debt mutual funds more beneficial again.