InvestorQ : Do you see mutual funds benefiting from the budget announcements on ULIPs and Provident Funds?
Rutuja Nigam made post

Do you see mutual funds benefiting from the budget announcements on ULIPs and Provident Funds?

2 years ago

Ahead of the Union Budget, the AMFI had heavily lobbied for tax exemptions on mutual funds to give them level playing field with the ULIPs. This budget has addressed that to some extent. To that extent, this budget will benefit the equity fund and ELSS investors with respect to the ULIP investors and that is a positive development for mutual funds.

ULIP investors had some advantages to begin with ahead of the budget, in the sense that they did not have to pay long term capital gains tax on redemption. This is unlike equity funds and ELSS that have to pay 10% on the capital gains above Rs.1 lakh. Also, the ULIP redemptions were not subjected to STT on redemption, unlike equity funds which are.

Both these anomalies have been largely addressed in this budget. Firstly, ULIPs that contribute more than Rs.2.50 lakhs per annum as premium will be subject to capital gains tax at the rate of 10% on the difference between the final value and the premium without the benefit of indexation. That is the case with equity funds too.

This move will ensure that HNIs don’t use ULIPs purely for tax arbitrage. Secondly, ULIPs will also be subjected to securities transaction tax just like equity funds. Today equity fund and ELSS redemptions are subjected to STT, which is a flat tax imposed without exception. This will give a level play field to MF investors at par with ULIP investors.

Even the PF change will add value to mutual fund investors, especially the debt fund types. In the recent past, many long term investors did not find debt funds to be very attractive when compared to the higher rates paid by provident funds and other small savings instruments. That is due to the multiple levels of tax breaks or EEE that PF offered.

With higher value PFs coming under the tax ambit; that attraction will not remain any longer. That would push the more conservative long term players and that will be a positive for debt fund flows. Also, doing away with the PF distortion will make the movement of yields smoother and make the debt fund returns predictable as well as more attractive as far as investors are concerned.