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No Retrospective Tax on Bond Fund Investments

There’s no authoritative statement yet, but newspapers reports suggest a serious rethink

The ridiculous and unjust retrospective tax on bond fund investments may not be applied. (See Budget Hits Mutual Fund Investors With Ill-Thought Out Tax).

While the government has not come out with a proper statement yet, reports carried today in The Economic Times and Business Standard suggest that the tax will either be effective July 10 or a later date. It could even be deferred to next year.

Another possibility is that existing investments could be ‘grandfathered’. Grandfathering means that investments made before the budget announcement will not attract the new tax, at least for some more period.

At this stage, all this is amounts to nothing more than leaks to newspaper reporters. Some of it could just be idle speculation. However, one thing is clear that the FM is seized of the matter and is aware of the fact that a retrospective tax would be an embarrassment after what he said in his speech.

Readers should note that this tax has two distinct and unrelated components. One is the increase in the tax percentage from 10 to 20 and other is the lengthening of the long-term capital gains threshold from one year to two years. It’s always possible that while grandfathering, the two might be treated differently.

Also, there is some serious hairsplitting going on in the bureaucracy. The Business Standard article quotes an unnamed official saying that “The tax on debt funds is retroactive and not retrospective”. Despite our best efforts we were neither able to understand this statement, nor find anyone who did. If any reader can figure out what this means, please be kind enough to post it in a comment below.