Investment taxation is a 4D matrix, simplifying it is crucial: Feroze Azeez shares his Budget wishlist

Q: The Union Budget is due on July 23. What are the broad expectations of the mutual fund industry from this budget?

Feroze Azeez:

This is the main budget for the third term of the Modi government. Firstly, the exemption limit for long-term capital gains, currently set at one lakh rupees per person since 2018, should be revisited. Given market valuations and inflation, it should be increased to two lakhs.Secondly, debt-linked saving schemes should be introduced. Currently, only equity-linked saving schemes get an exemption under Section 80C, while other instruments like post office schemes, EPF, and PPF are included. Mutual funds are not just equity platforms; they also encompass debt platforms. Including debt-linked saving schemes in the 80C one-and-a-half lakh limit would be beneficial.

Thirdly, specified long-term assets should include mutual fund infrastructure investments to get an exemption under Section 54EC, similar to real estate investments. This would promote investments in the mutual fund industry, which is the most transparent sector in the collective investment scheme arena.

Watch the full interview here.

Q: Let’s discuss AMFI’s 16-point budget proposal. AMFI has proposed an amendment to remove the arbitrage between fixed deposits and closed-ended debt mutual funds. What is your stance on this?
Feroze Azeez:

Closed-ended debt mutual funds, including fund of funds (FoFs) investing more than 35% in equity, fall under Section 50AA, introduced in FY23. This section states that any mutual fund not having more than 35% in equity will always be treated as a short-term asset, even if held for more than three years. Fund of funds investing more than 35% in equity, albeit indirectly through ETFs or other mutual funds, should be exempt from Section 50AA. This is a crucial point in AMFI’s proposal.

FDs and debt mutual funds are now on par after the inclusion of Section 50AA. Debt mutual funds primarily cater to corporate treasuries, while retail investors prefer equity mutual funds. Debt mutual funds do not compete with FDs. Post the inclusion of Section 50AA, holding debt funds for 10 years still results in a 38-39% tax in the highest bracket. The banking industry should not push for further detriment to debt mutual funds, as enough has been done to level the playing field.

Q: Given that the indexation benefit has been removed from debt mutual funds, do you think the government will bring it back?
Feroze Azeez:

I personally think indexation should be a birthright of an investor who is investing in conservative assets. I think the Indian household has funded the fiscal deficit of the country by lending money to the government for years and decades. The foreigners always invested in Indian equity and unfortunately, Indian domestic households did invest in equity, but they invested in the debt of the Indian government. So, the point I am trying to make is when the country needed borrowing the most to fund the fiscal deficits of our country, the Indian households supported them. Now that we are included in the global bond index and 30 billion dollars has come or is expected to come in the next year in the bond market of Indian debt, I think now is the time to reward household savings by giving them exemptions on the debt side and the equity side is my belief.

Q: What should be the focus of this budget for equity markets, and what is one essential change needed at this point?
Feroze Azeez:

The most needed change is simplified taxation. It is a 4-dimensional matrix. The current system is incredibly complex, with different rules for different asset classes, time periods, and tax treatments. STT, and non-STT paid are different taxation. Simplifying investment taxation is crucial. I believe this government has shown immense progress in simplifying, both the direct tax and corporate tax. I wish and pray that investment taxation can be simplified, that is the need of the hour. If Indians have 830 lakh crores, is the Indian household savings, 830 lakh crores. If that has to be suitably invested by laypeople, taxation has to be very simple across asset classes. Simplification is the need of the hour.

Regarding equity markets, the budget is priced in, the budget is priced from the perspective that the budget will be good. So, if the budget is good, the market should sustain these levels because earnings are catching up beautifully. Quite a few people are very worried about the market levels rightly so because if Nifty is at 24,700, 24800, those are very large prices optically, but the earnings have also caught up. The earnings estimate for us at the beginning of the year was Rs 960, I think we have ended at more than Rs 1030, Rs 1040 for the last financial year. Earnings have also been more than expected, 18-20% growth on Nifty earnings for the last one year, tells me that if the budget is even good, the market will sustain. If the budget is lower than the expectation, the markets could give a breather, especially given the fact that FIIs now are 80% long in index futures. Whenever FIIs are long 80% or short 80%, the market tends to move the opposite direction. So, some word of caution, the budget has to be very good or good for the markets to sustain.

Q: Which sectors will the mutual fund industry focus on post-budget?
Feroze Azeez:

I believe the focus will shift towards financial services, particularly banking, both in the PSU and private sectors. Defence and infrastructure sectors might be overdone, but core financial services have reasonable valuations, making them attractive investment options.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts/brokerages do not represent the views of Economic Times.)

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