The demand has been raised by industry body Association of Mutual Funds in India (Amfi), which in its proposal sent to the Ministry of Finance has said that it was “logical” to do so as this could encourage retail investor participation in bond markets. “We request for an amendment to Finance Act, 2023 and consider the mutual fund units as securities, with long-term capital tax rate thereon should be according to / in line with the capital gains tax on bonds, debentures, SDL and G-secs etc,” the Amfi budget proposal document said.
In the case of FOFs, investors buy shares in funds instead of investing in a pool of securities like stocks and bonds.
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For FOFs, a particular scheme is treated as an-equity oriented fund (EOF) only if a minimum of 90% of the total proceeds of such fund are invested in the units of another fund and which in turn also invests a minimum of 90% of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange.
Meanwhile, for other categories of mutual funds, the EOF status is accorded if 65% of the proceeds go into the securities listed on domestic exchanges.
“Currently, equity-oriented FoFs do not enjoy the same tax treatment as direct equity funds,” Adhil Shetty, CEO of Bankbazaar.com said, hinting at a profound impact on them if the budget implements tax changes. In his view, a favourable tax treatment may attract more retail investors to equity-oriented FoFs, resulting in higher inflows.
“Investors looking for diversification would benefit from equity-like taxation, making these funds a more appealing option. FoFs could become more viable for tax-conscious investors, simplifying investment decisions since investors wouldn’t need to differentiate between direct equity funds and equity-oriented FoFs based on tax implications alone,” he opined.
Abhishek Dev, Co Founder and CEO at Epsilon Money Mart said that the treatment of equity oriented FOFs in line with other equity-oriented funds will bring structural consistency. “Since the idea is to reward equity participation in economic growth, the equity oriented FOFs play the same role. Many of these FOFs are created to assist solution orientation through judicious packaging of predominately domestic equity sub asset classes,” Dev said.
Taxation for EOFs
If FoF is classified as an equity fund, the tax on Short Term Capital Gains(STCG) is 15% on investments sold within one year of investment while the tax on Long Term Capital Gains (LTCG) is 10% for income in excess of Rs 1,00,000 and sold after one year of investment.
If a FoF is classified as a debt fund, and if units are redeemed within three years of purchase, the short-term capital gains (STCG) tax is applied. The gains are added to the individual’s income and taxed according to the tax slab of the individual. On the other hand, an LTCG tax of 20% with indexation is applicable for investments sold after three years.
Another demand from the government is regarding allowing all asset managers to launch pension oriented MF schemes with uniform tax treatment as the NPS (National Pension System).
Shetty said that by offering uniform tax treatment, the objective of greater financial inclusion could be achieved. The move would enable higher accessibility to people for planning their retirement, he said, adding that it would also lead to more competitiveness in the industry, improving products and increasing inflows into mutual funds.
While acknowledging NPS as a great product, Dev of Epsilon Money Mart said that there could be a good case for dedicated retirement and pension funds in mutual funds format – both for accumulation and retirement income given their reach and proven success track record with market linked strategies.
He however, pitched for specific guidelines that may be required for such products, given the long term nature of investments and sensitivity around the importance of sustaining consistent income for long periods across different market cycles.
Nuvama sees negative implications of the existing tax regime in both cases. It is less hopeful of the issues being taken in this year’s budget.
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(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
