Investors in debt mutual funds are angry that they will still be paying higher taxes and not getting the same concessions offered to property owners after the budget.

Some holders of debt mutual funds could end up paying 40 per cent more tax than they had originally planned because of this year's tax changes. The blow is especially hard because the government had specifically allowed for what's called grandfathering in the 2023 budget for debt mutual funds, meaning that any purchases before that would be taxed at the old rates.

This year’s changes have effectively junked the concessions offered in the 2023 budget. “In the last budget, they said that investments in 2023 will be grandfathered. Then, in this budget, they said that all indexation is removed, and the rates have been hiked. So the provisions in 2023 have gone totally.” says an industry analyst.

Loud protests by property owners forced the government to back down and allow grandfathering for real estate for any sales made before July 2024. Debt fund holders are now demanding similar concessions.

The Association of Mutual Funds in India has demanded that debt mutual funds should receive the same concessions that have been given to property owners. Alternatively, it has suggested that the benefit of indexation should be restored for debt mutual funds.

However, the government insists that such a change will not happen in the foreseeable future. “This is the unification that we have wanted to do. There is no intention to change this in the short run,” finance secretary T. V. Somanathan told a TV channel earlier this week.

Somanathan, on Saturday was appointed the cabinet secretary, or head of the civil service.

“I guess debt funds are a smaller group than property owners, Property owners can make a lt of hue and cry,” said one investment analyst.

The latest budget had done away with the benefit of indexation for property, debt mutual funds, gold and also unlisted securities. Indexation allows investors to adjust the purchase price of an asset or investment to reflect the impact of inflation. That effectively means lower capital gains taxes.

The government needs to bring back indexation “as it helps the investor get compensated to some extent for the loss caused by inflation” of 5-6.5 per cent a year, said chartered accountant Prakash Hegde. Now, “the investor's real return might turn out to be negative due to higher taxation," he said.

Also the new taxation rules create an unusual situation under which people who earn higher returns could end up paying lower taxes but investors who've made single-digit returns will pay much more. Property investors who had a more than 11 per cent gain, for instance, would have gained from the rules initially introduced in the budget but anyone who earned less than that would have been a loser.

Most debt funds offer a return of between 6 per cent and 8 per cent and this means that anyone who owns such funds will be hit very badly by the new changes.

Investment analysts point out that India’s bond market is still underdeveloped and that it’s important to create conditions for its growth. AMFI has also pointed out that debt fund holders are often older with a cautious investment profile.

“The bond market in India has not developed so much. Retail investments in the bond market are very limited,” said a debt fund broker. “If you want an alternative to bank sourcing, which is, you know, a little cheaper, and for corporates to reach out to have more revenues, then development of the bond market is important,” he said.

“Unless retail participates in it, the market will always be very limited and this move by the government makes bonds that much less attractive,” he added.

The mutual fund industry’s assets under management have soared during the last decade from Rs 10 lakh crore to Rs 60 lakh crore.

The corporate bond market in India has grown to 44 lakh crore from 16.49 lakh crore in 2014. Analysts say the government’s budget could hurt expectations that the market could reach Rs 100-120 lakh crore by 2030, fuelled by infrastructure and other spending.