The no-indexation rule and our recommended debt funds

The government has dropped a bombshell on debt funds by changing its taxation rules. The new provisions ​will significantly increas​e ​the tax burden and lower the post-tax returns that you can expect from debt funds. What has changed? Until now, if you sold your debt fund within three years, the gain was added to your income and was taxed as per your slab. For investments beyond three years, it was taxed at 20 per cent after providing the benefit of indexation. But under the new changes, the gains from all mutual funds that have less than 35 per cent equity exposure (effectively debt funds, Gold funds and international funds) will not get indexation benefits anymore. Instead, it will be added to your income that year and be taxed at your tax slab. As far as our 'Best Buy' coverage is concerned, short-duration, international equity, liquid and overnight funds will be impacted. For a fuller view of the impact, refer to the below table. How significant is the impact? Pretty substantial. Assuming you invested Rs 5 lakh in a short-duration fund at 7.5 per cent three years back. Below are your post-tax returns: As can be seen, indexation benefits in the existing tax laws allow you to earn higher post-tax returns, mor