0 hidden charges. 0 forex

New Tax Regime and Its Impact on Debt Mutual Funds: Should You Invest in FDs Instead?

Reviewed by
Created on
May 4, 2023


What’s Inside

The introduction of a new tax regime is always a period of uncertainty in bond markets, especially due to the changes in income tax slab rates and new finance proposals. When Smt. Nirmala Sitharaman, Finance Minister, presented the union budget on 1st February, the Finance Bill was also passed in the lower house. A number of modifications, including changes in taxation rules, have been proposed by the government in the budget and the bill.

Long term capital gains of debt mutual fund

The removal of the LTCG tax benefit from the debt mutual fund was an important feature of the Finance Bill. The government has announced that if you invest 35% or less of debt mutual fund in equity shares, you have to pay taxes at the appropriate income tax slab rate. This means that your long-term capital gains will be considered short-term capital gains, just like the FDs of banks. Also, if you invest more than 65% in mutual fund schemes in specific debt securities, they will be considered LTCG.

In the previous tax regime, if you invest in a debt mutual fund, and it has a holding period of more than three years, it was considered an LTCG. Post the indexation tax benefits, the LTCG gains were levied an income tax of 20%+surcharge.

The current tax rate for capital gains from the exchange of mutual funds, aside from equity mutual funds, with a holding period of more than three years, will be taxed 20% after indexation tax benefits.

The gains from the movement of units of specific mutual funds would be treated as short-term capital gains. The taxation will be based on the income tax rate slabs. There is also the taxation of debentures along with this.

The government has also proposed an increase in the securities transaction tax on options and futures contracts.

Changes that can happen in the debt market

With a reduction in LTCG benefits, people may not invest more in mutual funds. Many may shift from debt mutual fund investments to FDs. Finance gains from mutual funds depend on a volatile market. But the term capital gains from FDs have no risk. Previously many people wanted to invest in mutual funds due to indexation and the LTCG tax benefit. Since the long-term tax benefit is now not available, people will be inclined to invest in FDs.

For gains tax reasons, a pure debt fund will become less appealing to people. Also, if they invest in LIC policies valued at ₹5 lakh or more, they will receive more benefits than mutual funds. The change in mutual funds taxation and lack of tax advantage can affect the growth of the debt capital market.

Experts believe that people nearing their retirement may invest in debt instruments other than the debt mutual fund due to reduced tax advantage. The Finance Bill also gives a good boost to equity mutual funds. It might be risky to invest in equity mutual funds, but people may be inclined toward them as they offer better gains and tax advantages compared to debt mutual fund.


The new tax regime introduced by the government has brought about significant changes in the debt market. The removal of the LTCG tax benefit from debt mutual funds is one such change that could lead to people shifting their investments to FDs, which have no market risk. The increase in securities transaction tax on options and futures contracts is another change that could affect the market. Additionally, the reduced tax advantage of pure debt funds could make them less appealing to investors. Despite these changes, experts believe that equity mutual funds still offer better gains and tax advantages compared to debt mutual funds, and thus, people may be inclined towards them. Overall, the impact of the new tax regime on the debt market remains to be seen, but it is crucial for investors to be aware of the changes and their implications before making investment decisions.

Insulate yourself against market risk on Fi Money

If you're concerned about the recent changes in taxation rules and want to save tax, investing in commission-free Mutual Funds via Fi Money might be a good option. With over 800 direct Mutual Funds to choose from and an intuitive user interface, Fi makes it easy for both novice and seasoned investors to invest. Plus, Fi is 100% secure as it operates under the guidance of epiFi Wealth, a SEBI-registered investment advisor. Investing daily, weekly, or monthly is simple via automatic payments or SIPs, which can be created with just one screen tap. And, Fi offers 100% flexibility with no penalties for missed payments.

In addition to Mutual Funds, Fi offers a range of other investment options for both short-term and long-term goals. Jump, Fi's Peer-to-Peer investment feature, can help you beat inflation and earn up to 9% p.a. If you're saving up for a short-term goal and want to earn interest on it, you can select Fi's super-flexible Smart Deposit. And, if you're looking for higher and more stable returns, Fi's Fixed Deposit might be the way to go.

With the recent changes in taxation rules, investing in Mutual Funds can help you save tax while growing your wealth. By choosing Fi, you can invest in a variety of investment options that suit your goals and investment style. With its user-friendly platform, 100% flexibility, and expert guidance, Fi can help you navigate the changing tax landscape and achieve your financial goals.

Frequently Asked Questions

1. Which is the better investment option, Fixed deposit or Debt mutual fund?

FDs always offer a fixed gain from the investment, whereas debt mutual fund typically outperform FDs in terms of gains for the same tenure. The main benefit people got from a debt mutual fund was the tax advantage. But with the LTCG tax advantage being removed by the government, people who do not want to take much risk can invest in FDs. If you are looking for higher liquidity and want greater returns, you can invest in a debt mutual fund.

2. What are the best tax-saving mutual funds in India?

The tax-saving mutual funds you can invest in India include the following:

  • Quant Tax Plan
  • Mirae Asset Tax Saver Fund
  • Kotak Tax Saver Fund
  • Canara Robeco Equity Tax Saver Fund
  • DSP Tax Saver Fund
  • Tata India Tax Savings Fund
  • Motilal Oswal Long Term Equity Fund, and
  • ICICI Prudential Long Term Equity Fund (Tax Saving)

3. What are the best ELSS mutual funds in 2023?

Some of the best ELSS mutual funds in 2023 include:

  • Quant Tax Plan
  • Bandhan Tax Advantage (ELSS) Fund
  • PGIM India ELSS Tax Saver Fund
  • Kotak Tax Saver Fund
  • Mirae Asset Tax Saver Fund
  • Canara Robeco Equity Tax Saver Fund, and
  • SBI Long Term Equity Fund.


Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
Share this article
Copied Link!
New Tax Regime and Its Impact on Debt Mutual Funds: Should You Invest in FDs Instead?


View similar articles in
Get the Fi app