Finance Minister P Chidambaram presented the Budget proposals for 2013-14 in Parliament on 28 February 2013. While the 1 hour and 45 minute speech highlighting the expenditures and revenues was a massive task, listed below is a comprehensive picture of what would be the impact on mutual funds and retail debt market investors.
To increase retail participation in the capital markets, the Budget 2013-14 has liberalised tax provisions in the Rajiv Gandhi Equity Saving Schemes (RGESS). First time investors can invest their money in specified mutual fund (MF) schemes and listed shares of companies and enjoy tax deductions for three successive years.
The income limit for RGESS is raised from Rs. 10 lakh to Rs. 12 lakh. It will certainly attract more investors in equity market/mutual funds. Earlier, investors with income less than Rs. 10 lakh could avail of a tax break up to 50% of the amount invested in equity. As per earlier provisions, investments in subsequent years were not counted for the tax benefits.
This budget marginally hikes the limit of the gross income up to which one can subscribe to this scheme to Rs.12 lakh, and the scheme has been extended for three years.
The Budget has cut the STT (securities transaction tax) on equities and mutual fund units. The STT charge on equity futures is cut from 0.17% to 0.1%. In the previous Budget, STT was slashed by 0.17% from 0.125% on cash delivery transactions.
The STT charge on redemption of mutual funds or ETFs (exchange traded funds) at fund counters is reduced from 0.25% to 0.001%, while STT on sale of MFs or ETFs on stock exchanges is cut from 0.1% to 0.001% levied only on the seller.
STT has been reduced to Rs. 1 from Rs. 250 per lakh on redemption of ETF/MF from fund houses and to Rs. 1 from Rs. 100 per lakh on redemption of ETF/MF from exchange. However, the reduction in STT rates is marginal. Also, the reduction in STT rate would be more beneficial for traders and not for long-term investors.
Mutual fund advisors registered with AMFI (Association of Mutual Funds in India) are allowed to be members of mutual fund segment on stock exchanges. The move is aimed to expand MF advisors business and increase the volume of trade in MFs or ETFs.
Pension and provident funds are allowed to invest in ETF and debt MFs. This would attract more investment in the mutual fund industry and provide more liquidity to ETFs on the exchanges. It will also give pension and provident funds greater flexibility to invest their funds.
The surcharge on DDT (dividend distribution tax) for all MF schemes is increased to 10% from 5%. To provide uniform taxation for all schemes—other than equity oriented fund—the Budget proposes to increase the rate on distributed income from 12.5% to 25% in all cases where distribution is made to an individual or an HUF (Hindu Undivided Family). This will impact the net returns on dividend schemes of all mutual fund schemes for the investor.
To enhance the debt market, stock exchanges will be allowed to launch a debt segment on the exchange, the Budget highlighted. Banks and primary dealers will be the proprietary trading members. Insurance companies and provident fund organisations will be permitted to trade directly in the debt segment with the approval of the sectoral regulator.
Tax-free bonds will be launched to collect Rs. 500 billion in 2013-14 by approved public sector companies against the target of Rs. 600 billion in 2012-13. The ministry of finance will coordinate with RBI in launching inflation-indexed bonds/National Savings Certificates to protect savings from inflation, especially for salaried class and the middle class people.