Budget 2025: A Hidden Tax Relief for Debt Mutual Fund Investors!
Tue, 11 Feb 2025
3 mins
Did you know debt mutual fund (MF) investors stand to save significantly on taxes after the latest budget? Surprisingly, not many are aware of this benefit!
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What the Budget Announced?
The Finance Minister declared, "No Income Tax on income up to Rs. 12 lakh." However, this doesn’t apply to capital gains from stocks or real estate. So, even if your total income is below Rs. 12 lakh, capital gains from these sources will still be taxed.
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But Here’s the Good News for Debt MF Investors:
Capital gains from debt mutual funds can now be used to claim a rebate under Section 87A. There's a catch, though—this applies only to investments made after April 2023.
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Example 1: The Case of Mrs. A
Consider Mrs. A, a retired individual with no other income. She sells part of her debt MFs, booking Rs. 12 lakh in capital gains:
- Before April 2025 (old rules): She would have paid Rs. 83,200 in taxes.
- After April 2025 (new rules): Thanks to Section 87A, she pays zero tax! This is because taxes on income up to Rs. 12 lakh will be fully rebated.
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What About Debt MFs Bought Before April 2023?
Debt MFs purchased before April 2023 are taxed differently:
- They attract a 12.5% Long-Term Capital Gains (LTCG) tax.
- Since they fall under special tax rates, they aren’t eligible for the Section 87A rebate.
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Example 2: Mr. A’s Situation
If Mr. A redeems debt MF units (acquired before April 2023) and books Rs. 12 lakh in capital gains:
- Before April 2025: The basic exemption limit is Rs. 3 lakh. Tax applies to Rs. 9 lakh at 12.5%, totaling Rs. 1.17 lakh.
- After April 2025: The exemption limit rises to Rs. 4 lakh. Now, tax applies to Rs. 8 lakh at 12.5%, amounting to Rs. 1.04 lakh.
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To bring it to a close
Debt MFs bought after April 2023 benefit from full tax rebate on gains up to Rs. 12 lakh. Debt MFs bought before April 2023 will still be taxed at 12.5% LTCG without rebate, but the increased exemption limit helps reduce tax slightly.
This budget change is a game-changer for debt MF investors, especially retirees and those with minimal other income. Make sure to plan your investments and redemptions accordingly to maximize your tax savings!
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