When I look at portfolios today, one of the biggest shifts I notice is how tax treatment has changed the way we approach debt mutual funds. For years, they offered stability, predictable returns, and—equally important—a tax advantage through indexation. That landscape is different now, and in 2025, many investors are beginning to compare these funds against other asset classes. Real estate and alternative funds, particularly AIFs (Alternative Investment Funds), are regaining attention as attractive long-term stores of value and yield generators.

What Changed?

Earlier, if you held a debt mutual fund for more than three years, your gains qualified as long-term and were taxed at 20% with indexation. Indexation was a powerful benefit—it adjusted your purchase price for inflation, ensuring you paid tax only on real, not nominal, gains.

From April 1, 2023, the rules shifted. All new investments in debt funds are now taxed at your income tax slab, regardless of how long you hold them, and the indexation benefit is gone. In July 2024, another adjustment created a flat 12.5% tax option for older holdings. Here’s where things stand today:

Why Does It Matter?

If you invested after April 2023, the absence of indexation can increase your tax outgo. For example, a ₹1 lakh gain taxed at a 30% slab costs you ₹30,000 in tax—compared to much lower liability under the old regime. On the other hand, if you

hold pre-April 2023 investments and redeem them now after two years, you benefit from the flat 12.5% rate, which is attractive for higher-income investors.

But here’s the bigger picture: this rule change has reduced the structural advantage of debt MFs, prompting many high-net-worth and family office investors to rethink their fixed-income allocations.

The Shift Toward Real Estate and AIFs

• Real Estate as a Store of Value: With debt MFs losing their tax edge, investors are increasingly turning to real estate for long-term appreciation and stability. Commercial real estate has been drawing interest through structured vehicles that offer predictable cash flows.
• AIFs Filling the Yield Gap: Category II AIFs, which often channel capital into real estate projects or structured credit, have seen robust inflows. In FY25 alone, nearly ₹74,000 crore was deployed into real estate through AIFs, making it the largest single sector for alternative allocations. Investors view these funds to access secured, asset-backed returns with potentially superior post-tax outcomes compared to debt MFs.
• REITs and InvITs Gaining Ground: Regulatory reforms are also enabling mutual funds to increase their exposure to REITs and InvITs. These listed real-asset trusts provide steady rental yields and inflation-linked appreciation, making them compelling substitutes for traditional debt instruments.

The key takeaway is clear: the removal of indexation has effectively eliminated the main tax shield that once made debt mutual funds attractive for long-term investors. As a result, many are reallocating part of their portfolios toward real-asset strategies such as real estate, REITs, InvITs, and AIFs.

These alternatives offer two advantages:

1. Potentially better post-tax outcomes – Rental yields, structured payouts, and profit distributions in AIFs can sometimes be taxed more efficiently than slab-rate debt MF gains.
2. Alignment with long-term wealth goals – Real assets provide tangible ownership, inflation-linked growth, and portfolio diversification, making them suitable for investors seeking stability and appreciation beyond traditional fixed income.

What Should You Do?

1. 1. For investments made on or after April 1, 2023:
      These are always taxed at your income slab with no indexation benefit. If you are in a higher tax bracket, review whether continuing to add money into debt funds makes sense, or if alternatives like AIFs, REITs, or hybrid products can deliver more tax-efficient outcomes.

• For investments made before April 1, 2023 and redeemed before July 23, 2024:
  This window is already closed. If you redeemed during that period, your tax treatment would have been based on the <36 or ≥36-month rule. Nothing further to act on here—just ensure your filings reflected the correct method.

• For investments made before April 1, 2023 and still held today (redeemed on/after July 23, 2024):

1. 1. • If your holding period is less than 24 months, any redemption now will be taxed at slab rates. Consider whether it is worth waiting until you cross 24 months to qualify for the flat 12.5% rate.
      • If your holding period is 24 months or more, you are already eligible for the 12.5% flat tax. Evaluate whether this is a good time to redeem, especially if you need liquidity or want to reallocate to other asset classes.

• Plan around your broader goals: Beyond the tax rules, weigh your decisions against cash flow needs, return expectations, and diversification. With debt funds losing their traditional indexation edge, many investors in 2025 are blending allocations toward real estate, AIFs, and REITs to balance yield, tax efficiency, and long-term wealth creation.

Disclaimer: This note is for educational purposes only. Tax rules may vary based on your income level, investment timing, and choice of tax regime. Please consult a qualified tax advisor before making investment or redemption decisions specific to your situation.