MFs eye on gains from real estate

Seek Centre's nod for having coming Budget channelise capital gains on property into their schemes, as was the case in 1996-2000

The Rs 12-lakh-crore mutual fund sector has set its sights on the capital gains from sale of immovable property.

In a proposal to the Union ministry of finance, the Association of Mutual Funds in India (Amfi) has asked for inclusion of funds in the exemption list under Section 54EC of the Income Tax Act. Currently, tax exemption under this section is available only if the long-term gains from sale of immovable property are invested in specified long-term assets — the bonds issued by government entities Nabard and NHAI — that are redeemable after three years.

“The flight of money from financial markets into real estate sectors has become an irreversible phenomenon. It is expedient to broaden the list of the specified long-term assets under Section 54EC by including MF units, whether equity or debt-oriented (wherein the underlying investments are made into infrastructure sub-sector), based on investors’ choice and risk appetite, with a lock-in period of three years,” says Amfi's letter to the ministry.

Sector executives argue that most individuals liquidate their financial assets to purchase a home property, with or without the aid of home loans. “This money, once invested in immovable property using the sale proceeds from MFs or stocks, never comes back into the capital markets. People invariably re-invest the capital gains arising from sale of an immovable property to buy another property to avail capital gains tax exemption,” says a top official in the sector.

Sector insiders told Business Standard that if this demand was approved, it could be a big booster for the MF sector, as there are many individuals having more than one home, for investment purposes. “This will help channelise some gains back to the capital markets via MFs, benefiting both the investors and the industry,” said the chief executive officer of a mid-sized fund house.

THE SECTOR’S DEMANDS

ON RGESS

• Removal of complications in identifying first-time investors and constraints on types of eligible schemes
• First-time investors be recognised through PAN at an industry level
• Once tagged as first-time investors, they be incentivised with tax exemption of Rs 1 lakh under separate sub-section

ON MF-LINKED RETIREMENT PLAN

• All Sebi registered MFs be allowed to launch pension plans with eligibility for tax benefits under separate sub-section
• Investments in MFLRP be allowed separate/exclusive deduction of Rs 50,000

ON EQUITY-LINKED SAVINGS SCHEMES (ELSS)

• ELSS be allowed additional deduction of Rs 50,000 under Section 80C, with an enabling provision to allow utilisation of any unutilised amount within the Rs 1.5-lakh limit under Section 80C

Incidentally, this new plea is also a request for re-imposition of a practice in place prior to the year 2000. In 1996, sections 54EA and 54EB were introduced to channelise investment into priority sectors of the economy and give impetus to the capital markets. Under these sections, capital gains from transfer of a long-term capital asset were exempted from tax if the amount of net consideration or the amount of capital gain was invested in certain specified assets, including MF units, redeemable after three years.

However, in the Union Budget of 2000-01, these two sections stood withdrawn and a new Section 54EC was introduced, whereby investors could avail tax exemption only if the gains were invested in bonds issued by Nabard or NHAI.