'Debt funds won't be taxed…' Deepak Shenoy explains taxation proposed under New Income Tax Bill 2025

Ahead of the introduction of new Income Tax Bill in the Lok Sabha on Thursday, Deepak Shenoy, Founder, Capital Mind, explained the proposed bill, which would replace the Income Tax Bill, 1961, does not make debt funds taxed as long-term capital gains. He noted that all gains from debt funds is only short-term capital gain.

As per the proposal in the Income Tax Bill 2025, irrespective of anything contained in section 2(101) or section 72, the gains on the transfer or redemption or maturity, of a capital asset as mentioned in sub-section (2) shall be treated as short-term capital gains and shall be computed as
per sub-section (3).

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“The new income tax bill does not make debt funds taxed as long term capital gains at all. Here’s the clause that says all gains from debt funds is only short-term capital gain,” Shenoy said in a post on social media platform X. 

For the purposes of sub-section (1), the capital asset shall be—

(a) a unit of a Specified Mutual Fund acquired on or after 1st April, 2023
or a Market Linked Debenture; or

(b) an unlisted bond or an unlisted debenture which is transferred or
redeemed or matures on or after the 23rd July, 2024.

(3) For the purposes of sub-section (1), the short-term capital gains shall be
computed as per the following formula:––

X = A – B – C,

where,––

X = short-term capital gains;

A = full value of consideration received or accruing as a result of the
transfer or redemption or maturity of the debenture or unit or bond;
B = the cost of acquisition of the debenture or unit or bond; and
C = the expenditure incurred wholly and exclusively for such transfer or
redemption or maturity.
 
The bill further proposes:

(a) “Market Linked Debenture” means a security, by whatever name called, which has an underlying principal component in the form of a debt security and where the returns are linked to market returns on other underlying securities or indices, and include any security classified or regulated as a
market linked debenture by the Securities and Exchange Board of India; and

(b) “Specified Mutual Fund” means a Mutual Fund, by whatever name called, which invests more than 65% of its total proceeds in debt and money market instruments or a fund which invests 65% or more of its total proceeds in units of such Mutual Fund, subject to the following:––

(i) the percentage of investment in debt and money market instruments or in units of a fund shall be computed with reference to the annual average of the daily closing figures;
(ii) “debt and money market instruments” shall include any securities, by whatever name called, classified or regulated as debt and money market instruments by the Securities and Exchange Board of India.

Capital gains tax on debt funds

Debt mutual funds, with over 65% of investments in debt and money market instruments, have varying tax treatments based on the acquisition date.

If purchased before April 1, 2023, Long-Term Capital Gains (LTCG) are taxed at 12.5% without indexation. However, for acquisitions on or after April 1, 2023, the gains are taxed at applicable slab rates without the option for indexation benefits.

Short-Term Capital Gains (STCG) are taxed at slab rates regardless of the acquisition date.

Clarity on capital gains tax on different assets

Many equity investors are interested in potential changes to the capital gains tax regime under the new Income Tax Bill of 2025. According to the proposals outlined in the bill, it is expected that there will be no adjustments to the capital gains tax framework. The new legislation is anticipated to be presented in Parliament tomorrow, February 13, 2024.

In an effort to simplify the existing complex capital gains structure, the government implemented a new capital gains tax regime effective July 23, 2024.

Under this revised system, capital assets are categorised into listed securities and unlisted securities/non-financial securities, each subject to different rules for determining short-term or long-term capital gains based on the holding period. LTCG on these instruments is taxed at 12.5 per cent without the benefit of indexation, while STCG is taxed at applicable slab rates. 

Unlisted shares must be held for a minimum of 24 months in order to be considered long-term capital assets. For these shares, long-term capital gains (LTCG) are subject to a 12.5% tax rate without indexation, whereas short-term capital gains (STCG) are taxed at slab rates.

Long-Term Capital Gains (LTCG) on immovable property require a holding period of 24 months to be classified as such. If the property was acquired before July 23, 2024, LTCG will be taxed at either 20% with indexation or 12.5% without indexation. 

However, properties acquired on or after this date will be subject to a uniform LTCG tax rate of 12.5% without indexation. On the other hand, Short-Term Capital Gains (STCG) on immovable property are taxed at applicable slab rates.