Heavier tax on debt funds will hit our corporate bond market hard
The withdrawal of India’s capital gains tax benefit on debt mutual funds is significant for various reasons. The first is that it seems aimed at the country’s overall goal of a tax structure that is simple, with few exemptions and benefits. Second, following from the first, it indicates that over the next few years, just as all debt is taxed in a similar manner, equity sops may also end. Already dividends are taxed at the slab rate and no capital gains are tax-free. The ₹1 lakh limit may also go at some point. Third, while the market absorbs these announcements, it should be prepared for further such changes that withdraw tax benefits. Alternative structures are presently being offered for income tax and corporate tax. One may expect convergence in the next few years.