InvestorQ : Is it true that the Budget 2019 has made some big changes to the taxation on FOFs and what are the major implications of this shift?
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Is it true that the Budget 2019 has made some big changes to the taxation on FOFs and what are the major implications of this shift?

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Arti Chavan answered.
2 years ago
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With the central purpose of promoting the CPSE-ETF, (which is structured as an FOF), the government in its 2019 budget extended several sops to the FOFs. This is expected to make the FOFs relatively more popular as is already evident from their inflows. Here are some of the major changes proposed on taxation of FOFs proposed in the Union Budget 2019.

a) Budget 2019 has proposed a change in the taxation rules for the fund of funds (FOFs). The proposal is to allow the concessional rate of tax for short-term capital gains on the transfer of units of FOF. Of course, this will only apply to predominantly equity FOFs. On the long term front, the difference may not be substantial. The idea is to ensure that FOFs are also enthused to invest in the CPSE ETF.

b) Fund of Funds invest in other mutual fund schemes but do not directly invest the money into assets such as debt securities or equity shares. Effectively there are debt FOFs and equity FOFs and their taxation will now differ. This is contrary to the current situation where all FOFs irrespective of the underlying asset holdings are getting taxed as per debt fund (non-equity) taxation.

c) Budget 2019 has proposed to tax equity-oriented FOFs in the same way as equity funds with respect to short term capital gains. The taxation will be at a concessional rate of 15 per cent. Effectively, short-term capital gains on equity FOFs will also attract concessional rate of taxation.

d) Treatment of long term gains is the same as before as the additional advantage of concessional equity tax is not much in the longer horizon.

Surely, a start has been made to make the FOFs more attractive to investors. Rationalizing tax issues is a good start.

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