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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Selection

An investor in the 30% tax bracket has a 2-year horizon and wants low volatility. A distributor compares a short-term debt fund held 2 years with a bank fixed deposit. Both have an identical pre-tax yield of 7% a year. Which statement is most appropriate under current rules for debt funds bought after 1 April 2023 that invest mostly in debt?

Gains from such debt funds are taxed at the investor's slab rate regardless of holding period, with no indexation. So for a 30% bracket investor there is no tax-rate advantage over a fixed deposit, apart from the deferral of tax until redemption.

  1. ADebt fund gains are taxed at the investor's slab rate, so there is no tax advantage over the FDCorrect
  2. BDebt fund gains are taxed at 12.5% after two years
  3. CDebt fund gains enjoy indexation after three years
  4. DDebt fund gains are fully exempt after one year

Explanation

Specified mutual funds (mostly debt) have gains taxed at slab rate irrespective of holding period, with no indexation. So the tax treatment is similar to FD interest, apart from deferral until redemption. The other options describe benefits that do not apply.

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