Budget 2019 has proposed a change in the taxation rules for the fund of funds (FoF). The proposal is to allow the concessional rate of tax for short-term capital gains on the transfer of units of FoF investing in CPSE ETFs.
The Fund of Funds is a mutual fund scheme which invests in other mutual fund schemes but does not directly invest the investor’s money into the assets such as debt securities or equity shares. There are debt FoF as well as equity FoFs and their taxation differs.
“Currently all FOFs irrespective of the underlying asset class gets taxed as per debt fund taxation. The concessional short term cap gains is being proposed for certain type of FoF only and not all of them,” says Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company.
Budget 2019 has proposed to tax CPSE FoF as that of equity fund’s STCG rate i.e. at a concessional rate of 15%. The Budget document states, “It is proposed to provide that concessional rate of short term capital gains tax shall also apply to fund of funds set up for disinvestment of Central Public Sector Enterprises (CPSEs), to which concessional rate of long term capital gains tax has already been extended.”
FoF is generally taxed as per the taxation structure of debt funds. However, Budget 2018 had provided a concessional rate of long-term capital gains tax under section 112A of the Act for the transfer of units of such fund of funds (equity-oriented) i.e. similar to equity LTCG taxation.
“As of date, there are no FOFs that invests in a CPSE fund or CPSE ETFs. Such structures could work well in a country like India where demat penetration is low as FOF is like another other MF scheme unlike ETF where a demat account is mandatory,” says Iyer.