Investors in debt mutual funds have a reason to celebrate following Budget 2025 and the recent repo rate cut by the Reserve Bank of India. Debt mutual funds, also known as fixed-income funds, invest in fixed-income securities such as government securities, debentures, corporate bonds, and money-market instruments. Although returns are not guaranteed, these investments are considered relatively stable with lower risk.
According to experts, investors who have invested in debt mutual funds may benefit from some significant tax-saving changes introduced in Budget 2025. However, the extent of tax benefits will vary depending on the timing of their investment.
Debt funds and taxation
Under the new regulations, the tax treatment of debt mutual funds differs for investments made before or after April 2023. Picture this:
If the investment was made after April 2023, any gains will be taxed according to the investor’s income tax slab. In addition, investors can now claim a rebate of Rs 60,000.
For investments made before April 2023, gains will be taxed at 12.5% after a holding period of two years. While investors will not be eligible for the rebate, Budget 2025 has raised the basic exemption limit, thereby reducing their overall tax liability.
“If you sell these investments after April 2025, you can use the Section 87A rebate to reduce your tax,” Chakrivardhan Kuppala, Cofounder & Executive Director, Prime Wealth Finserv, wrote in an article.
He elaborated with two scenarios:
1. Debt Mutual Funds purchased after April 2023
> You made Rs 12 lakh in capital gains from debt mutual funds.
> You have no other income.
Income Slab Tax Amount (Rs)
Up to Rs 3 lakh 0
Rs 3 lakh – Rs 7 lakh 20,000
Rs 7 lakh-Rs 10 lakh 30,000
Rs 10 lakh-Rs 12 lakh 30,000
Education Cess (4%) 3,200
Final Tax Payable 83,200
If you sell after Budget 2025 tax slabs are applied
Income Slab Tax Amount (Rs)
Up to 4 lakh 0
4 lakh-8 lakh 20,000
8 lakh-12 lakh 40,000
Total tax payable: 60,000
Rebate Under Section 87A: 60,000
Therefore, you can save at least Rs 83,200 after the new tax slabs are applied under the New Tax Regime.
2. Investment in debt funds before April 2023
“For funds bought before April 2023, LTCG tax applies after holding them for 2+ years. These gains are taxed at 12.5%. The rebate does not apply, but Budget 2025 has increased the tax-free limit from Rs 3 lakh to Rs 4 lakh, which helps reduce your taxable amount,” Kuppala explained.
Here’s how:
For instance: If you generated Rs 12 lakh in capital gains from debt mutual funds and do not have any other sources of income.
Income Slab Tax Amount (Rs)
LTCG Tax
(12.5% on Rs 9L) 1,12,500
Education Cess (4%) 4,500
Final Tax Payable: 1,17,000
Taxes after Budget 2025 (Selling After April 2025)
Income Slab Tax Amount (Rs)
LTCG Tax
(12.5% on Rs 9L) 1,00,000
Education Cess (4%) 4,000
Final Tax Payable: 1,04,000
Therefore, you sav You save Rs 13,000 by selling after April 2025.
“Budget has made debt funds more tax-friendly, especially for those who invested after April 2023. By taking advantage of the rebates and increased exemption limits, investors can save a lot on taxes. If you are planning to sell your investments, timing matters—selling after April 2025 could mean a big difference in your tax bill,” Kuppala added.
Repo rate cut affect on debt funds
On February 7, 2025, the Reserve Bank of India (RBI) announced a 25 basis points (bps) reduction in the repo rate to 6.25 per cent. This is the first rate cut in almost five years. Interest rate decreases have a favorable effect on debt mutual funds as they elevate bond prices. When the RBI lowers rates, older bonds with higher interest rates become more appealing compared to newer bonds. Consequently, bond prices rise, which in turn enhances the Net Asset Value (NAV) of the debt fund, Value Research explained in a note.
Long-term Investment Funds: These funds focus on investing in bonds with extended maturity periods. As a result, they experience greater advantages when interest rates decrease, as the bonds in their portfolio offer higher returns for an extended period.
Short-term Investment Funds: On the other hand, these funds specialize in bonds with shorter maturity periods. Although they also benefit from a rate cut, the impact is not as significant when compared to long-term investment funds.
