NDTV reports that the higher tax on debt mutual funds will apply only from July 10 onwards, and not “retrospectively”, from a statement given by Arun Jailtley (Finance Minister) to Parliament.

Which needs a change in the finance bill, to state that units of non-equity mutual funds that have been sold between April 1 2014 and July 10, 2014 and held for more than one year from purchase will be attract long term capital gains. This means a “proviso” needs to be added stating this intention.

However for investors in FMPs who bought for a year’s holding for the tax exemption, their exit will be classified as a short-term gain, and it’ll be added to their income. For them it’s retrospective by implication, since they had no idea about this when they invested.

Read: The Murder of the Debt Mutual Fund in this budget.

But the concept of retrospective taxation is only that a rule should apply on after the rule has been announced. In this case, the only reason that the rule was retrospective was that the budget came in July (usually in February). The difference? A Feb announcement allows a month to be able to do things since the tax changes apply from April onwards. A July announcement – because the budget was postponed due to the elections – is applicable, from the same April, so technically, it will apply to transactions made from April to July as well. This aspect has been addressed by Jaitley’s statement.

Lesson: Don’t invest in things because of tax benefits alone. The fact remains that short term funds, even today, give way better returns than fixed deposits, and even if the two were equally taxed (as they are now) I would choose the short term mutual fund.

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