Tax-Free Status Sought For Return From Gilts

The government must give tax-free status for income received by individuals from dedicated gilt funds and direct investments by individuals in gilts, former Reserve Bank deputy governor S S Tarapore said at the inaugural function of Kotak Mahindra's gilt fund and K-30 equity scheme here yesterday.

Tarapore said the government should deal with the glitches in taxation policy which is blocking the development of a strong retail market for gilts. He pointed out that it is unconscionable that large investors can receive unlimited tax free income by way of dividends and yet the government is unwilling to offer similar benefits to investors in dedicated gilt funds. Tarapore made a case for allowing dedicated gilt funds to invest in gilts abroad. "After all, India's official reserves are invested largely in government papers abroad and there is a merit in allowing the scheme for Indian mutual funds investing abroad to become operative for the dedicated gilt fund," he said.

 

He pointed out that the authorities had earlier cleared a scheme for mutual funds investment abroad, but had developed cold feet at the implementation stage. He said that by doing so "we have denied ourselves the benefit of portfolio diversification."

He suggested that this can be done by stipulating that a dedicated fund should not invest more than $50 million in government securities abroad and this should also be subject to a ceiling of 25 per cent of the fund's corpus.

Tarapore further added that it could be prescribed that the dedicated fund should, at all times, maintain a totally covered position for its investments abroad.

Tarapore said this would help Indian gilt funds to maximise its yields by assessing the domestic gilt yields with the foreign yields taken together with forward premia. He viewed that the launch of Kotak's gilt fund as historic and it will have an important bearing on the development of secondary market for Indian government papers.

Since the funds would attract individual investors, it would create a scenario for contrary market perception. In a largely captive investors base for government papers, he said, the market has been mostly one sided. "The emergence of gilt funds opens up large vistas for the mass of small savers and this would have far reaching implications for the entire financial system" he said.