Sun Jun 29 23:36:00 UTC 2025: Okay, here’s a news article summarizing the provided text, written from an Indian perspective, suitable for publication in “The Hindu” and fitting within their existing sections.

**The Hindu: Business & Economy**

**Navigating India’s Evolving Tax Landscape for Debt Investments**

**By [The Hindu Staff Writer, based on Ramya Kannan’s analysis]**

**June 30, 2025**

MUMBAI: Indian investors are facing a shifting landscape regarding the taxation of debt-oriented mutual funds (MFs), requiring careful consideration when allocating capital. Recent changes in tax laws, particularly impacting debt mutual funds and Fund of Funds (FoFs), necessitate a strategic approach to maximize returns.

Until April 2023, debt MFs offered tax advantages through indexation benefits on long-term capital gains (LTCG). However, new investments since then are taxed as short-term capital gains (STCG) at the investor’s marginal tax rate, significantly increasing the tax burden for many. The dividend option, now called Income Distribution cum Capital Withdrawal option was anyway taxable in the hands of the investor at a marginal slab rate.

The July 2024 Union Budget introduced a twist. Earlier, Fund of Funds (FoFs) were taxable as debt funds. Since July 2024, FoFs are taxable at 12.5% plus surcharge and cess over holding period of two years. Now, Debt-oriented FoFs, taxable at 12.5% plus surcharge and cess over a two-year holding period, have emerged as a potentially tax-efficient alternative. These FoFs often allocate a significant portion, around 60%, to debt funds, with the remainder typically invested in Arbitrage Funds.

Arbitrage Funds, while technically equity funds, generate returns from the price differential between cash and futures segments, mitigating reliance on overall equity market performance. This makes them a suitable component of a fixed-income allocation.

While FoFs involve two layers of expense ratios – one for the FoF itself and another for the underlying funds – experts suggest that the net tax efficiency for individuals in higher tax brackets can still make them beneficial.

Another category of MFs, those with equity allocation between 35% and 65%, were previously eligible for LTCG and indexation benefits over a three-year holding period. However, the 2024 budget removed indexation. After July 23, 2024, the funds are taxable viz. LTCG at 12.5% over a two-year holding period.

These funds often allocate a portion to commodities like gold or silver, alongside debt instruments. Investors should carefully assess the equity component within these hybrid funds to ensure alignment with their overall portfolio allocation strategy.

Gold and Silver Exchange Traded Funds (ETFs) are taxable at 12.5% plus surcharge and cess, on a 1-year holding period. You can buy and sell ETFs on stock exchanges similar to equity stocks. You need a demat and trading account with a broker. Online facilities make it easier. There are apps you can download and trade.

Financial experts, including Ramya Kannan, caution against prioritizing tax efficiency over fundamental investment principles. Portfolio allocation should be driven by investment objectives, risk-return profile, and investment time horizon. However, within the debt component of a portfolio, considering these debt-oriented funds can offer a more tax-efficient way to achieve financial goals. Investors are advised to stay invested for an adequate time period to realize the full potential of these tax-efficient returns.

*(This article is based on an analysis by Ramya Kannan, a corporate trainer (financial markets) and author.)*

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