Your Questions Answered: What are the comparisons and differences between FDs and debt mutual funds?

livemint.com:

financial planning, the choice between debt mutual funds and fixed deposits (FDs) remains a common conundrum for investors. Both instruments serve as repositories of savings, offering varying degrees of risk, returns, and liquidity. A thorough understanding of their nuances is crucial for making informed investment decisions.

Debt mutual funds were considered a tax-efficient investment option due to the favourable long-term capital gains (LTCG) tax treatment. Gains from debt funds held for more than three years were taxed at a concessional rate of 20% with the benefit of indexation, which allowed investors to adjust their cost basis for inflation. This made debt mutual funds more attractive compared to bank fixed deposits (FDs), where interest income was taxed at the individual's applicable tax slab.

The Budget 2023 removed the LTCG tax benefits for debt mutual funds. This means that gains from these funds, irrespective of the holding period, are now taxed at the investor's applicable tax slab, similar to short-term capital gains. The indexation benefit has also been withdrawn for these funds.

The removal of LTCG tax benefits has reduced the tax attractiveness of debt mutual funds compared to FDs. Investors in these funds will now face higher taxes on their gains, especially those in the higher tax brackets. This could lead to a shift of investments away from debt mutual funds towards FDs or other tax-saving instruments.

The new tax regime applies to investments made in debt mutual funds on or after April 1, 2023. Investments made before this date will continue to be taxed under the old rules. There are a multitude of differences between FDs and debt mutual funds.