Mutual funds have emerged as pivotal players in the Indian capital markets. In the last 5 years, we have seen AUM of mutual funds tripling from Rs.8 trillion to Rs.25 trillion. The SIPs are flowing in almost to the tune of $1.2 billion per month and there are more than 2 crore SIP accounts. But, what are mutual funds expecting from the Budget?
LTCG on Equity funds
In the 2018 Budget, the government imposed 10% LTCG tax on equities and on equity funds too. This is a big negative for investors who use equity funds as a tool to plan their financial future. LTCG reduces the yield by 200 bps in the short term and by nearly 40 bps in the long term. That would mean; you either need to reduce your plan targets or increase you savings. Since STT is already payable on redemption of equity funds, LTCG can be scrapped.
Scrap DDT on equity funds
The DDT on equity fund dividends was introduced in the 2018 Budget. This amounts to double taxation because companies have already paid tax when they declare dividends. In addition, there are a lot of investors who depend on dividends from mutual funds as a regular source of income. This DDT actually changes the economics of dividend income. The budget may look to scrap the DDT on equity mutual fund dividends to pacify investors.
Remove anomaly of FOFs
Fund of funds (FOFs) have failed to take off in India in a big way principally because of its skewed tax treatment. For example, even if a Fund of Equity funds is created, it is still treated as non-equity investment for tax purposes. This largely takes away the attraction of FOFs from a financial planning point of view. Globally, FOFs are extensively used by investors and financial planners to easily customize investment classes to specific goals. A more rational treatment of FOFs will go a long way!
Revive Section 54EF benefits
The benefit of Section 54EF pertains to reinvestment of capital gains in MFs to save tax. This was permitted till 2003, when it was entirely scrapped. The lock in period of 3 years can continue and this will be a big boost for mutual fund investments. It is time to revive benefits under Section 54EF on mutual funds.
Extend ELSS to debt funds
Currently, Section 80C benefits are only available to equity ELSS. This leaves out most conservative investors from that ambit. This can be overcome by extending the benefit of Section 80C to debt funds also, subject to a lock in period of 3 years. This would enable conservative investors to also get the benefit of tax saving and enhance their effective returns significantly.