Increased capital gains tax: mutual fund winners and losers

One of the key parts of Section 50AA was the definition of which funds would qualify as a specified mutual fund. Earlier, those funds which did not have a minimum investment of 35% in domestic equities were included in this category. This implied that the coverage extended to all debt funds. Moreover, some hybrid categories with a low equity component were included in this method of taxation.

However, categories such as gold funds, silver funds, international funds and even funds of funds were the most impacted as they did not have the required minimum exposure to domestic equities. They thus became collateral damage as the section that wanted to target debt funds also caught them in the new calculation.

Now, the Budget has attempted to rectify the situation by amending the definition of a particular investment fund. According to the new definition, this section would qualify funds that hold a minimum of 65% in debt and money market instruments during the year. Also, a fund that invests in units of such a fund that holds more than 65% in debt and money market instruments would also come under the new definition. This includes a fund of funds that has predominantly debt exposure.