80m Tax Rebates May Be Extended To Uti Investors

The Union finance ministry is considering a request from the Unit Trust of India (UTI) to extend the benefits of tax rebate under section 80M of the Income Tax Act to some of its schemes.

The exemption was earlier available to unitholders of certain UTI schemes. This was seen as one of the main reasons for the heavy buying in US-64, the largest investment scheme in the country. However, the benefit was withdrawn about two years ago, leading to a sharp decline in the US-64 corpus and precipitating large-scale redemptions in the other UTI schemes.

UTI is lobbying hard with the government to extend the 80M benefit once again. Under 80M, a corporate is entitled to claim tax rebate on the entire amount of dividend income from its units as long as it passes on the amount to its shareholders in the form of company dividends.

 

The nationalised banks, which account for a sizeable chunk of the investment in UTI schemes, are also pressing for the re-introduction of the tax rebate. The issue was raised recently at a meeting between the chairmen of these banks and finance minister P Chidambaram.

If applied, the provision would allow banks, public financial institutions, state finance and industrial corporations tax exemption upto 60 per cent of dividend income from investments in another domestic company. In case the investment is made in UTIs schemes, the permitted deduction could go upto 80 per cent of dividend income.

The proponents of restoring 80M argue that it is a sure-fire method of restoring the balance in the stock markets, where the foreign institutional investors have emerged as the prime movers of stock. UTI, which was once the largest player in the market, has now been reduced to being a net seller and can no longer influence the market movement as effectively as it once did.

Banks have been suggesting this measure in order to overcome government pressure for larger investments in corporate stock, which they regard as extremely risky. Instead, they prefer to route their investments through a market player like Unit Trust of India.

Banking sources also point out that the government, which is the largest shareholder in the nationalised banks, would benefit enormously from the tax break as dividend payouts would rise.

The move could also help revive the moribund capital markets. With increased dividends leading to greater shareholder value, investors might once again be attracted to the capital markets, particularly public issues by banks.

An upturn in the markets would be of great significance to the banking sector since more than six nationalised banks, including Canara Bank, Syndicate Bank and Punjab National Bank have drawn up plans to float public issues in the near future.