Will change in base year in Budget 2017 impact mutual fund taxation?

Finance Minister Arun Jaitely has proposed to change the base year to calculate the indexation benefit from 1981 to 2001 in the budget. Debt mutual funds qualify for long-term capital gains tax of 20 per cent with indexation benefit if held for more than three years.

“The change in the base year is across all asset classes. This will positively impact investors,” says Suresh Sadagopan, chief financial planner, Ladder7 Financial Advisories.

Suppose you are holding on to your investments made in debt funds before 2001. The Fair Market Value (NAV) as on 1^st April, 2001 will be considered as cost of acquisition for calculating capital gains. This will help the investor to reduce the capital gains taxes.


“The government has reset the base year to improvise and update,” says Sadagopan. Earlier, the base date for indexation purpose was 1^st April 1981.

The changes in the base year are not likely to affect mutual fund investors in a big way. This is because very few investors actually hold debt funds for such a long period. Sadagopan says only one in one lakh investors would be holding his investments in debt funds owned before 2001.

“The average holding period of a debt fund is around three to four years,” says Preeti Khurana, Chartered Accountant and chief editor, ClearTax.com. The gains from debt mutual funds are taxed at 20 per cent after indexation if sold after three years. Indexation doesn’t hold any relevance for equity funds as the long-term gains are tax free in equity funds. “I don’t see mutual fund investors being affected as investors don’t hold their investments for such a long period, 17 years,” says Khurana.