The mutual fund (MF) industry has sent its Budget wish list to the finance ministry, seeking clarity on the tax treatment of toxic assets held under a segregated portfolio and asking for long-term capital gains (LTCG) tax exemption for equity-oriented schemes.
The LTCG tax was levied on equity-oriented funds last year. The industry body — Association of Mutual Funds in India (Amfi) — pointed out that the introduction of LTCG tax places MF products at a disadvantage vis-à-vis unit-liked insurance plans (ULIPs).
“With high commissions and incentive structure in the life insurance sector, retail investors could be lured away by the insurance agents as retail investors may not understand the distinction between a pure investment product like MF and an insurance product with equity exposure. This could also lead to mis-selling of ULIPs,” said Amfi.
“LTCG tax is not bringing in revenues that the government had envisaged. Meanwhile, it is creating a mental barrier for investors looking at MF products. It is cumbersome for investors calculating tax-liability on their realised gains,” added Jimmy Patel, chief executive officer of Quantum Asset Management Company.
The industry has represented that toxic assets segregated in a separate portfolio or ‘side-pocketed’ should be treated like scheme mergers for tax purposes. Units allotted after merger of a scheme are not treated as capital gains and also the investment period and cost is calculated on the basis of investment in the original consolidated scheme.
The industry has also sought similar tax treatment when a unitholder switches from regular plans to direct plans or vice-versa or when the switch is in the case of growth and dividend plans. Currently, such switch-ins are subject to capital gains liability.
Further, the industry is seeking preferential tax treatment for MF schemes investing in infrastructure sub-sectors as notified by the Reserve Bank of India. It is proposed that MF units that are redeemable after three years, wherein underlying investments are made into equity or debt of ‘infrastructure sub-sector’, be included on the list of specified long-term assets under Section 54EC of the Income-Tax Act.
Besides, the industry wants more parity between MFs and ULIPs. It wants MF schemes to be exempt from dividend distribution tax in case of equity-oriented schemes. “Bonus paid in ULIPs by insurance companies, which is akin to payment of dividend in MFs, is not subject to dividend distribution tax or any levy (nor subject to any capital gains tax),” Amfi’s list of proposals read.
Similar to ULIPs — which don’t see any securities transaction tax (STT) getting levied on withdrawal proceeds — MFs, too, have asked for exemption from STT at the time of redemption.
Further, the industry has reiterated some of its earlier demands such as introduction of a debt-linked saving scheme, which would be similar to equity-linked saving schemes and eligible for tax exemptions for long-term investors.
Budget Wish list
- Seeks tax relaxation for scheme invested in infra sub-sectors
- Don't want segregation of toxic units to be a tax event
- Wants retraction of LTCG for equity-oriented funds
- Seeks tax parity with unit-linked insurance products