Ahead of Budget, Amfi calls for tax parity between debt securities, MFs

Ahead of the Union Budget for financial year 2022-23 (FY23), the Association of Mutual Funds in India (Amfi) has made a slew of proposals, including bringing in uniformity in taxation of listed debt securities and debt MFs and allowing MFs to launch pension schemes with the same tax treatment as the National Pension Scheme (NPS).

“It is only logical and fair to bring parity in tax treatment for direct investment in listed debt securities and indirect investment in the same instruments through debt-oriented mutual fund schemes. This parity between direct investments in a listed security (by corporates and HNIs) and indirect investments made through MFs by retail investors would also prevent tax revenue leakage,” said Amfi’s note.

At present, units of debt-oriented MFs have a minimum holding period of 36 months to qualify as long-term capital assets. It is 12 months for direct investments in listed securities such as bonds, debentures, government securities, derivatives, etc, and zero coupon bonds.

To encourage deepening of capital markets through MFs, Amfi has also suggested introducing debt-linked saving schemes (DLSS). It further proposed that investments up to Rs 1.5 lakh under DLSS be made eligible for tax benefit under a separate sub-section and subject to a lock-in period of five years (just like tax saving bank fixed deposits).

Another proposal was with regard to similar tax treatment on capital gains from MF investments and unit-linked insurance plans (Ulips) of insurance companies. The proceeds from Ulips are exempt from income tax under Section 10(10D) of Income Tax (I-T) Act, if the sum assured in a life insurance policy is at least 10 times the annual premium and withdrawn after a lock-in of five years. 

PROPOSALS FOR BUDGET 2022-23

• Uniformity in taxation on listed debt securities and debt mutual funds
• Parity in tax treatment in respect of intra-scheme switching of units under MF schemes
• Partial modification of ELSS to allow investment of any amount instead of multiples of Rs 500
• To reduce tax/TDS rate for NRIs on STCG from debt schemes from 30 per cent to 15 per cent
• To permit insurance companies to outsource fund management activities to AMCs

In comparison, long-term capital gains (LTCG) arising out of the sale of listed equity shares and units of equity-oriented MF schemes are taxed at the rate of 10 per cent if the LTCG exceeds Rs 1 lakh in a financial year.

To mitigate the hardships of retail investors, Amfi has also called for increasing the threshold limit of withholding tax on income distribution by MF scheme and partially modifying equity-linked savings schemes (ELSS) to allow investments of any amount.

Amfi has proposed that insurance companies be allowed to outsource fund management activities to asset management companies (AMC).

“This would result in both MF and insurance industries complementing each other in accessing households with financial products which could be simple investment products manufactured by the asset management industries or insurance products which could bundle an element of investment,” said Amfi.

It also called for a revision of DPE guidelines to permit Maharatna, Navratna and Miniratna CPSEs to invest their surplus funds in any MF, irrespective of whether it is a public or private sector one.

“The current investment restrictions on CPSEs is rather monopolistic and restrictive, as it denies good investment opportunities to the CPSEs who are compelled to invest their surplus funds only in public sector MFs, thereby losing competitive opportunity to invest in private sector MFs with good track record,” Amfi said.