InvestorQ : What changes could the Budget bring about for the mutual fund industry?
Gayatri Surendran made post

What changes could the Budget bring about for the mutual fund industry?

varsha Motwani answered.
1 year ago
As of the close of December 2021, the AUM (assets under management) of India mutual funds stands at approximately $500 billion. The mutual fund industry is said to gather pace once the AUM crosses $1 trillion, but that is still some time away. What is material is the fervent growth in the last few years.

Given below are a few changes that could help the industry grow at a faster pace-

  • Parity between tax on debt funds and bonds
The definition of long-term debt funds is a holding period of 36 months. In contrast, the definition of long term in the case of listed bonds, debentures, and government securities is 12 months. Bringing parity between the LTCG definition on debt funds and debt instruments should be accounted for in the Budget this year.

  • Parity between the tax treatment of equity funds and ULIPs
Since April 2018, all equity funds are taxed at a flat rate of 10% on long-term capital gains, held for more than 1 year. This will be applicable on gains above Rs1 lakh per fiscal year. However, any partial withdrawal, premature withdrawal or final withdrawal of ULIPs is free of tax. ULIPs are taxed as insurance products while they are promoted as investment products. This has to change.

  • Switching plans within the same fund must be exempt from the capital gains tax
Currently, if you switch from a dividend plan to a growth scheme or vice versa, it is treated as capital transfer and subjected to capital gains tax. Similarly, when you switch from the regular plan to the direct plan of the same fund, such inter-scheme transfers are again classified as capital transfers. It is expected that the Union Budget will remove this taxation anomaly for inter-scheme transfers.

  • Raising the threshold for TDS deduction on mutual fund dividends
Since mutual fund dividends became taxable from April 2019 due to the scrapping of DDT, the Income Tax department has stipulated tax deduction at source (TDS) in case the income distribution is more than Rs5,000 per financial year. Investors feel this limit is too low and needs to be increased to Rs50,000 per year. More so, since the current exemption limit on bank FD interest for TDS has been raised from Rs10,000 to Rs40,000. This would reduce the hassles for investors to file returns and then wait for the refund.

  • Extend Section 54EC to a mutual fund for LTCG benefits
Between 1996 and 2000, there were Section 54EA and Section 54EB wherein long-term capital gains on other assets could be reinvested in mutual funds with lock-in periods of 3 years and 7 years respectively. However, in Budget 2001, these two sections were replaced by Section 54EC, but it only gave this exemption benefit to infrastructure bonds issued by REC and NHAI. It is proposed that in the Budget 2022-23, these benefits of Section 54EC can be also extended to mutual funds having a portfolio that is predominantly invested in infrastructure assets. Also, the 3-year lock-in period can be continued.

  • Adopting global best practices on fund management outsourcing
The global practice is for insurance companies to focus on managing risk and building products while investment management is outsourced to professional mutual funds. That is not permitted in the current regulations. SEBI Act and the IRDA rules need to be tweaked to this effect. This would reduce the hassles for insurance companies and open up a new avenue for mutual funds to expand their franchise.