Yes, you’re correct. The taxation of debt funds will be impacted after the changes announced in the recent 2025 Budget. Moreover, debt funds purchased before and after April 2023 are also treated differently.
Taxation of debt funds
First, let’s understand the tax rates applicable for debt funds:
Now, as you can see, debt funds purchased after April 2023 are taxable at your slab rate irrespective of holding period.
- Any income taxed at slab rate is eligible for rebate u/s 87A.
- This rebate limit has been revised to ₹60,000 in the recent budget, which means income up to ₹12 lakh is effectively tax-free.
So, if you realise capital gains in the next financial year (FY 2025-26), this rebate will be applicable. If this is your only source of income, then there will be no tax payable up to ₹12 lakh.
What about debt funds purchased before April 2023?
- If you sell these in the next financial year, the holding period will cross 24 months, making them long-term capital gains.
- These gains are taxed at a special rate of 12.5%.
- Since they are not taxed at slab rates, rebate u/s 87A will not apply.
- The entire gain amount will be taxable at 12.5%.