Debt Mutual Fund Taxation in India: What Investors Need to Know After Budget Changes

After the setback in the previous budget, debt mutual fund investors have found renewed optimism in Budget 2025. Finance Minister Nirmala Sitharaman announced that individuals with incomes up to ₹12 lakh will effectively pay no income tax due to a ₹60,000 rebate under Section 87A. However, this relief does not extend to all types of income, particularly capital gains from stocks and property sales.

Understanding the Tax Rebate: Not All Income Qualifies 

While the ₹12 lakh tax-free threshold sounds promising, it is essential to understand that capital gains taxed at special rates do not qualify for this rebate. For instance, if an individual earns ₹10 lakh from salary and ₹2 lakh from capital gains, the rebate applies only to the salaried portion. The capital gains tax still needs to be paid separately.

Fortunately, debt mutual funds purchased after April 2023 fall under Section 50AA and qualify for the rebate, unlike units acquired before April 2023, which are taxed differently. The key rule to remember is that income taxed at slab rates is eligible for a tax rebate, whereas capital gains from equities, equity MFs, and property sales are not.

How Will This Benefit Debt Mutual Fund Investors? 

To illustrate the impact of these changes, let’s take an example of a retiree who redeems part of their debt mutual fund portfolio purchased after April 2023.

Before April 2025

If Raj realises ₹12 lakh in capital gains from his debt mutual fund before April 2025, this income will be taxed as per the slab rates. Under the new tax regime, any income above ₹3 lakh becomes taxable. This means Raj would pay ₹83,200 in tax (including cess) if he sells before April 2025.

After April 2025

If the same investment is redeemed after April 2025, the tax liability would be zero, thanks to the ₹60,000 rebate under Section 87A and an increased exemption limit from ₹3 lakh to ₹4 lakh. This results in a direct tax saving of ₹83,200.

What About Debt Funds Bought Before April 2023? 

Debt mutual funds purchased before April 2023 fall under Section 122 and do not qualify for the rebate. These funds, when held for over 24 months, attract a long-term capital gains tax (LTCG) of 12.5%. However, Budget 2025 still offers partial relief.

Scenario 1: Selling Before April 2025

A person with ₹12 lakh in capital gains from a debt fund bought before April 2023 would be taxed at 12.5% on ₹9 lakh (₹3 lakh exemption limit). This results in a tax liability of ₹1.12 lakh plus ₹4,500 education cess, totalling ₹1.17 lakh.

Scenario 2: Selling After April 2025

Post-April 2025, the exemption limit increases to ₹4 lakh, meaning only ₹8 lakh of gains would be taxed at 12.5%, reducing the total tax liability to ₹1.04 lakh. The increased exemption limit effectively saves ₹13,000 in taxes.

Key Takeaways for Debt Mutual Fund Investors

1. Know Your Purchase Date: If you acquired debt mutual funds after April 2023, your gains are taxed at slab rates and are eligible for the ₹60,000 rebate under Section 87A.
2. Budget 2025’s Impact: The exemption limit increase from ₹3 lakh to ₹4 lakh helps investors reduce their tax burden.
3. Timing Matters: Investors planning to redeem their debt mutual funds should consider waiting until after April 2025 to maximise tax benefits, unless an urgent need arises.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.