7 Key Expectations of Mutual Funds from the Union Budget 2023-24

January 11, 2023 Mutual Fund

The Association of Mutual Funds in India (AMFI) has floated proposals for the Union Budget FY 2023-24. In its elaborate budget wishlist, AMFI has proposed measures which would make the Indian mutual fund industry more investor friendly and take it to the next level of growth.

Notably, many of these proposals have been part of the AMFI’s wishlist for the past several years, but unfortunately, it has fallen on deaf ears.

Here are the key points proposed by AMFI which are aimed at making mutual funds more retail-investor friendly:

1) Uniform tax treatment on capital gains

AMFI has requested uniform tax treatment to ensure a level playing field between equity mutual funds and ULIPs. Currently, Long Term Capital Gains (LTCG) arising out of the sale of equity-oriented mutual funds are taxed @10% if the gains exceed Rs 1 lakh. However, proceeds from ULIPs are exempted from Income Tax if the sum assured in a life insurance policy is at least 10 times the annual premium and withdrawn after a lock-in period of 5 years. Although ULIPs are considered as insurance products for tax purposes, they are essentially investment products that, like mutual funds, invest in securities but come with insurance benefits. AMFI has highlighted that the SEBI has in the past emphasised that similar products should get similar tax treatment, and there is a need to eliminate tax arbitrage that results in launching similar products under the supervision of different regulators.

2) Introduction of Debt Linked Saving Scheme

AMFI has proposed the introduction of Debt Linked Saving Scheme (DLSS) on the lines of Equity Linked Saving Scheme (ELSS). This would help channelise the long-term savings of retail investors into higher credit rated debt instruments with tax benefits, which will help in deepening the Indian Bond Market.

It has proposed that investment up to Rs 1.5 lakh under DLSS be eligible for tax benefits subject to a lock-in period of 5 years. According to AMFI, DLSS will help small investors participate in bond markets at low costs and at a lower risk as compared to equity markets. This will also bring debt-oriented mutual funds at par with tax-saving Bank Fixed Deposits, where the deduction is available under Section 80C.

3) Launch of pension-oriented mutual fund schemes

AMFI has proposed that Indian Mutual Funds be able to launch Mutual Fund Linked Retirement Scheme (MFLRS), which would be eligible for the same tax concessions available to National Pension System (NPS). Notably, investment in NPS is eligible for tax deduction under Section 80CCD (1) & 80CCD (1B) of the Income Tax Act, 1961, with Exempt-Exempt-Exempt (E-E-E) status.

A majority of NPS subscribers are from the government and organised sector. Hence, MFLRS could target individuals who are not subscribers to NPS, especially those from the unorganised sector and provide them with an option to save for the long term, coupled with tax benefits.

4) Taxation on debt securities and debt mutual funds

AMFI wants 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. A direct investment in listed debt securities and zero-coupon bonds (listed or unlisted), if held for more than 12 months, is treated as a long-term investment. On the other hand, if the said investment was made through a debt-oriented Mutual Fund scheme, the period of holding increases to 36 months for it to be regarded as a long-term investment.

Thus, there is a need for harmonising the tax treatment on investments in debt-oriented mutual funds and direct investments in debt securities.

For this, AMFI has proposed bringing the two at par by either:

(I) Treating investments in debt-oriented mutual fund schemes which invest predominantly in fixed-income instruments (such as government securities, corporate bonds, money market instruments, etc.) as long term if they are held for more than 12 months;

Or

(ii) Increasing the minimum holding period for direct investment in listed debt securities and zero coupon Bonds (listed or unlisted) to 36 months to qualify as long-term capital asset.

5) Inclusion of FoFs under equity-oriented mutual fund

AMFI has proposed that the definition of equity-oriented mutual funds be revised to include investment in Fund of Funds (FoF) schemes which invest a minimum of 90% of the corpus in units of equity-oriented mutual fund schemes, which in turn invest a minimum of 65% in equity shares of domestic companies listed on a recognised stock exchange.

Currently, FoFs investing in equity-oriented mutual funds are categorised as non-equity-oriented mutual funds for taxation purpose. Since the underlying portfolio of FoFs investing in equity-oriented majorly consists of domestic equities, AMFI is of the view that the tax treatment should be the same in both cases.

6) Parity on tax treatment on Intra-scheme switching of units

AMFI has proposed Intra-scheme switches (i.e. switching of investment within the same scheme of a mutual fund) should be exempt from payment of capital gains tax as no gains are realised in such a case. Therefore, AMFI has requested that amendments be made so that switching of units from (a) Regular Plan to Direct Plan or vice-versa; and (b) Growth Option to Dividend Option or vice-versa, within the same scheme of a mutual fund are not regarded as transfer and hence, shall not be charged to capital gains.

7) Mutual Fund units to be classified as specified long term assets

AMFI has proposed that mutual fund schemes (whether equity or debt-oriented) wherein the underlying investments are made into specified ‘infrastructure sub-sector’, as notified by the Government of India, should be included in the list of specified long-term assets under Section 54EC. Such investments can have a lock-in period of three years to be elgible for exemption from long-term capital gains under Section 54EC.

The proposals by AMFI, if implemented, will bring mutual funds on par with comparable investment avenues and thereby boost inflows in equity and debt schemes.

This article first appeared on PersonalFN here