The 2024 debt-fund change
In this chapter: Slab-rate taxation regime · What survives, what doesn't — practical implications
Pre-April 2023, debt mutual funds got LTCG benefits (20% with indexation) after 36 months. Post-April 2023, all debt fund gains are taxed at slab rates regardless of holding period. The change eliminated the tax-arbitrage between debt funds and FDs.
What remains tax-favoured: SGBs (gold appreciation tax-free at maturity), PPF (EEE), NPS (EEE up to 60% lump sum), VPF (EEE within ₹2.5L cap), ELSS (equity tax treatment). What's now slab-rate: debt mutual funds (all categories), gold ETFs/funds, international funds with >65% foreign equity (some categories). Practical implication: for high-tax-bracket investors, debt mutual funds and FDs are roughly tax-equivalent. Use FDs for guaranteed-yield, fixed-tenure needs (ladder them); use debt funds for liquidity and slightly higher pre-tax yields. SGBs replace gold ETFs for long-term gold exposure.
A nuanced angle: international diversification cost rose. Funds with >65% foreign equity (some specified ones) are debt-classified for tax — meaning S&P 500 funds, Nasdaq 100 funds, etc. give slab-rate taxation. Net of that, the after-tax return advantage of investing internationally vs Indian equity is much smaller. Some specific international fund categories may still get equity treatment depending on classification — check the latest SAI. Also: arbitrage funds (which use derivatives to be market-neutral) maintain ≥65% equity gross exposure and continue to get equity tax treatment — useful for short-term parking with debt-like risk but equity tax.