“Hold a debt fund for three years and pay 20% with indexation” is still the rule most retail investors repeat. It was true - until the Finance Act 2023, and even then only for units bought before 1 April 2023. Two changes since have removed it for everyone, not just newer investors, reaching back to holdings that predate the first change.
- Finance Act 2023, effective 1 April 2023: under the new Section 50AA, gains on units of a “specified mutual fund” - one investing 35% or less in equity shares of domestic companies - acquired on or after that date are deemed short-term capital gains regardless of how long they’re held. Always taxed at the investor’s slab rate. No LTCG rate, no indexation, at any holding period.
- The one carve-out this left: units bought before 1 April 2023 kept the old regime - 20% LTCG with indexation, if held over 36 months.
- Finance (No. 2) Act 2024 removed that carve-out too. For units bought before April 2023 but sold on or after 23 July 2024, the LTCG rate drops to a flat 12.5% - but indexation is gone, and the qualifying holding period fell from 36 months to 24.
Withdrawn in Two Steps, the Second Reaching Backward
The net effect: indexation on debt fund gains does not exist anywhere in the current rulebook - not for new investments, not for old ones. It wasn’t narrowed. It was withdrawn in two steps eleven months apart, and the second step reached backward to holdings the first step had explicitly protected.
Here is what that actually costs, on an illustrative example:
An investor bought ₹10,00,000 of a debt fund in 2018 and sells today for ₹16,00,000 - a ₹6,00,000 nominal gain.
- Old regime (indexation): assume the inflation adjustment over that holding period shrinks the taxable gain to roughly ₹2,00,000. Tax at 20% = ₹40,000.
- Current regime (post-23 July 2024): 12.5% flat on the full ₹6,00,000 nominal gain, no indexation. Tax = ₹75,000.
A Lower Rate on a Larger Number Is a Bigger Bill
The lower headline rate doesn’t mean a lower bill. On this holding, the investor now owes nearly twice as much, because the number the rate applies to almost tripled once indexation was removed.
The specific rupee figures here are illustrative - the real inflation adjustment depends on the exact years held and the cost inflation index the tax department publishes annually. The direction isn’t: for a holding old enough to have benefited meaningfully from indexation, swapping “20% of a shrunk gain” for “12.5% of the full gain” usually raises the bill, not lowers it. No subsequent budget has reinstated indexation for debt funds, in any form, for any holding period.
Recompute any debt holding acquired before April 2023 rather than carrying the old rule forward. Swapping 20% of an indexed gain for 12.5% of the full nominal gain usually raises the bill on a long-held position, and no budget since has reinstated indexation in any form.
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