The Rs 61 trillion mutual fund (MF) industry has sought tax concessions for debt schemes in its proposal for the upcoming Budget, advocating for equal treatment of debt funds and debentures on the taxation front.
“It is requested that capital gains on redemption of units of debt-oriented MFs held for more than three years should be taxed at the rate of 10 per cent without indexation, as applicable in respect of debentures,” the Association of Mutual Funds in India (Amfi) stated in its Budget wish list.
The proposal comes over a year after the Budget 2023 removed the indexation benefit from debt funds, resulting in higher tax outgo for investors. The change in taxation has led to the drying up of flows in medium-to-long-term horizon debt schemes.
Amfi said that higher investor participation is crucial for the development of the debt market in India, and improved tax efficiency in debt funds can boost retail inflows.
“An active bond market could serve multiple purposes. Besides providing borrowers with an alternative to bank credit, corporate bonds could lower the cost of long-term finance. Active participation by retail investors in these markets would not only help diversify their investments but also garner inflation-adjusted returns,” the industry body said.
In another tax-related proposal, the industry has called for a change in the taxation of all fund-of-funds (FoF) investing in equity-oriented funds. Currently, FoFs must meet two conditions to qualify for equity taxation: investing at least 90 per cent of the corpus in equity schemes and ensuring that the schemes they invest in allocate a minimum of 90 per cent to domestic equities.
According to Amfi, most FoFs fail to qualify for equity taxation due to the second condition. It noted that since equity schemes have the flexibility to invest between 65 per cent to 100 per cent in equities, this creates a hurdle in meeting the second condition.
“It is requested that the definition of ‘equity-oriented funds’ be revised to include investments in FoFs schemes that invest a minimum of 90 per cent of the corpus in units of equity-oriented MF schemes, which, in turn, invest a minimum of 65 per cent in equity shares of domestic companies listed on a recognised stock exchange,” Amfi demanded.
Amfi has also proposed that the government allow all MFs to launch pension-oriented MF schemes with uniform tax treatment as the National Pension System (NPS). It argued that while there are three broad investment avenues for post-retirement pension income — NPS, retirement MF schemes, and insurance-linked pension plans — only NPS is eligible for tax exemptions under Section 80CCD.
It added that while certain retirement MF schemes qualify for tax benefits under Section 80C, the process to get the fund notified by the Central Board of Direct Taxes is time-consuming.
“It is proposed that all Securities and Exchange Board of India-registered MFs should be allowed to launch pension-oriented MF schemes, namely, ‘MF-Linked Retirement Scheme’, with similar tax benefits as applicable to NPS under Sections 80CCD (1) and 80CCD (1B) of the Income-Tax Act, 1961,” the industry body said.
First Published: Jul 11 2024 | 9:06 PM IST
