With the union budget scheduled to be announced this week, AMFI (Association of Mutual Funds in India) has submitted the below wish list for mutual funds –
- Introduce “Debt Linked Savings Scheme” (DLSS) on the lines of Equity Linked Savings Scheme, (ELSS),
The introduction of DLSS will help small investors participate in bond markets at low costs and at a lower risk as compared to equity markets. This will also bring debt oriented mutual funds on par with tax saving bank fixed deposits, where deduction is available under Section 80C.
2. To abolish capital gain tax on switching of mutual fund units from regular plan to direct plan (and vice versa) and Growth Option to Dividend Option or vice-versa
As per current Income Tax provisions, switching of Units from Growth Option to Dividend Option (or vice-versa) or from a Regular Plan to a Direct Plan (or vice-versa) within a mutual fund scheme is subjected to capital gains tax, even though there is no monetary transaction involved, either on the part of the investor or on the part of the mutual fund w.r.t. the underlying securities of the scheme.
In a switch transaction whether from Growth Option to Dividend Option (or vice-versa) or from a Regular Plan to a Direct Plan (or vice-versa) within the scheme, the amount of investment remains within the same scheme, i.e., there is no change in the underlying securities and scheme’s portfolio being common for both Growth & Dividend Options, remains unchanged.
It is submitted that switch transactions within the same mutual fund scheme should not be regarded as transfer and hence, should not be charged to capital gains tax.
3. To reconsider the matter and exclude equity mutual fund units from the ambit of LTCG tax and maintain status quo ante, insofar as LTCG from equity mutual fund schemes are concerned, keeping the interest of the retail investors and to ensure level playing field between equity mutual fund schemes and ULIPs.
4. To abolish the STT levied at the time of redemption of Mutual Fund Units by the investor.
5. To abolish the DDT on dividend paid under equity oriented mutual fund schemes
6. It is recommended to eliminate Dividend Distribution Tax, when mutual funds declare dividends in their respective funds to the extent of dividends received by them from the companies to eliminate double taxation.
7. Mutual Fund Units should be notified as ‘Specified Long-Term Assets’ qualifying for exemption on Long-Term Capital Gains under Sec. 54 EC
It is proposed that, mutual fund units that are redeemable after three years, wherein the underlying investments are made into equity or debt of ‘infrastructure subsector’ as specified by RBI Master Circular in line with ‘Master List of Infrastructure sub-sectors’ notified by the Government of India, be also included in the list of the specified long-term assets under Sec. 54EC. While the underlying investment will be made in securities in infrastructure subsector as specified above, the mutual fund itself could be equity-oriented scheme or debt-oriented scheme, based on investors’ choice and risk appetite. The investment shall have a lock in period of three years to be eligible for exemption under Sec. 54EC. Alternatively, a new sub-section 54EF be introduced, wherein long term capital gains from mutual funds can be reinvested in other mutual funds (on the same lines and rationale as 54EC for sale transactions in immovable property) and long term capital gains can be saved by the investor.
8. Intra-Scheme Switches (i.e., switching of investment within the same scheme of a Mutual Fund) should not be regarded as a “Transfer” under Section 47 of the IT Act, 1961 and be exempt from payment of capital gains tax.
At present, “switching” of investment in Units within the same scheme of a Mutual Fund from Growth Option to Dividend Option or vice-versa, constitutes a “Transfer” under the current Income Tax regime and is liable to capital gains tax, even though the amount invested remains in the mutual fund scheme, i.e., EVEN THOUGH THERE ARE NO REALISED GAINS, since the underlying securities/ portfolio remaining unchanged, being common for both Options.