Mutual Funds need parity with ULIPs
This has been the constant refrain of AMFI Indian mutual funds seem to be at a disadvantage to unit linked insurance plans (ULIPs).
- Inter-scheme transfers within the AMC are treated as independent transactions and taxed as capital gains accordingly. On the other hand, investors in ULIPs are allowed to switch from one scheme to another without attracting any capital gains tax in the process. AMFI has demanded parity for MFs on par with ULIPs.
- The second area is on LTCG. Equity funds are subject to long term capital gains tax at 10% for gains above Rs.1 lakh in a year. This is without benefit of indexation. Capital gains on ULIPs are tax free and AMFI has also asked for parity on this front.
- The third area where there is disparity is in the imposition of securities transaction tax (STT). When an equity fund is redeemed, it is treated as a market sale and subjected to STT. This reduces the net returns and puts ELSS funds at a disadvantage versus ULIPs. AMFI has demanded scrapping STT on equity funds.
There are two demands that AMFI has made in this regard.
- The first demand pertains to putting debt funds at par with listed bonds. Debt funds are classified as long-term assets only if held for more than 3 years. On the other hand, listed debt and zero coupon bonds are treated as long term if held for more than 1 year. This was leading to tax arbitrage as an investor holding debt funds for 2 years will have to pay peak rate of tax while a similar listed zero coupon bond will only attract 10% tax.
- The second demand has been in the works for a long time. AMFI wants the CBDT to permit launch of tax saving funds in debt instruments via debt linked savings schemes (DLSS). This would have the same tax benefits like ELSS funds. AMFI has also asked for a dedicated limit for DLSS to broaden and deepen the bond markets.
In the last budget, government had made dividends on mutual funds taxable like other income at the peak rates applicable. It also meant that such dividends started attracting TDS. However, the withholding limit has been defined at Rs5,000 per year. If the dividends are above Rs5,000 per year then TDS will be applicable.
AMFI is of the view that this limit may be too low considering that bank interest has a TDS-free limit of Rs40,000 for individuals and Rs50,000 for senior citizens. AMFI wants the minimum dividend for TDS purposes to be hiked at par with bank interest to Rs40,000 per annum so that unnecessary paperwork and refunds can be entirely avoided.
MF Retirement Plans at par with National Pension Scheme (NPS)
In previous budgets it was announced that retirement plans of mutual funds would be placed at par with NPS for tax purposes. However, not much has progressed. AMFI has demanded that all retirement and pension plans that are run by SEBI registered mutual funds should be put on par with NPS for tax purposes.
Currently, MF retirement plans are covered under the Rs150,000 limits for Section 80C. However, that is already an overcrowded limit. AMFI wants the Union Budget to extend the benefit of Section 80CCD to MF retirement plans also. This will ensure that they get an additional Rs.50,000 exemption each year, and are at par with NPS.
Reintroduce Section 54EA and 54EB for capital gains
Between 1996 and 2001, people could reinvest their long term capital gains in mutual funds with a lock-in period and such capital gains would be exempt from tax. However, in 2001, these sections were removed and Section 54EC was introduced, which only permitted reinvestment in infrastructure bonds of NHAI, REC, and PFC etc.
AMFI has demanded reintroduction of this section where investors would be allowed to reinvest their long term capital gains in mutual funds and claim LTCG tax exemption.
AMFI has also asked for allowing insurance companies to outsource their fund management activities to mutual funds and also permit CPSEs to invest in mutual funds. It is not clear how many of these changes will be accepted by the finance minister, but in a Budget that promises to be unprecedented, this is AMFI’s best chance to push through its MF agenda.