Finance Bill passed in Lok Sabha without discussion amid sloganeering

Tax benefits for debt mutual funds removed; Individuals earning marginally over Rs 7 lakh get relief

Lok Sabha on Friday passed the Finance Bill, 2023 with 64 official amendments, including the removal of long-term tax benefits for debt mutual funds and providing relief to individuals earning marginally higher income than the no-tax ceiling of Rs 7 lakh under the new tax regime.

As per the tax proposals announced in the Union Budget 2023-24, taxpayers with an annual income of upto Rs 7 lakh would not be required to pay any tax if he/she opts for the new tax regime.

However, under the old proposals even Re 1 higher than Rs 7 lakh would attract tax liability of around Rs 25,000.

As per the amendments introduced in the Finance Bill, 2023, the tax payable should not be more than the income that exceeds Rs 7 lakh. This means, if an individual’s income is Rs 7,01000, the tax liability will be Rs 1000. Individuals having income up to Rs 7,27,700 stands to benefit from the proposed relief.

Tax advantages of debt mutual funds have been removed. Now capital gains from debt mutual funds will be treated as short-term capital gains, bringing it at par with other interest earning instruments like fixed deposits (FDs).

Analysts said the removal of tax benefits would turn investors away from the mutual fund.

“The amendment in the finance bill will have significant structural changes to the way we invest,” said Srikanth Subramanian, CEO, Kotak Cherry.

For mutual funds to get investor interest, it will now have to purely be on their ability to add extra “risk-adjusted returns” and not because of any tax arbitrage. The tax arbitrage that was available at an “instrument” level seems to be getting evened out across the board be it debt mutual fund or market-linked debentures.

However, this will benefit the corporate bond market where there will be renewed interest from retail investors, and this will also add depth to the liquidity which again will mean better pricing for the end customer, said Subramanian.

Currently, investors in debt funds pay income tax on capital gains according to the income tax slab for a holding period of three years. After three years these funds pay either 20 per cent with indexation benefits or 10 per cent without indexation. After the amendment, such gains from transfer of units of specified mutual funds will be treated as short-term and taxed at slab rates.

Other important amendments to the Finance Bill include a 25 per cent hike in securities transaction tax and doubling of the royalties and fees from technical services earned by non-resident foreign firms.

Securities transaction tax on the sale of options has been increased to 0.062 per cent from 0.05 per cent. The rate of tax on royalties and fees from technical services earned by non-resident foreign firms has been doubled to 20 per cent from 10 per cent.

The Finance Bill, which contains tax-related proposals, was passed in Lok Sabha without a discussion. The Bill was passed by voice vote amidst sloganeering by opposition members for setting up a JPC in the Adani-Hindenburg issue.