Budget 2016: Equity Fund-of-Funds should get tax treatment of equity funds

Jayant Pai PPFAS Mutual FundWhenever it comes to drafting a Union Budget wishlist, I am reminded of a tagline of a Shahrukh Khan starrer which stated “All I want is...everything”. Every industry creates lists which can only be fulfilled by the mythical wizards which abound in fairy tales. Avowedly capitalist industry chieftains who swear by free markets, suddenly morph into supplicants beseeching a boondoggle or two. Hence, it is with some trepidation that I write this...The mutual fund industry has experienced bitter-sweet moments during previous Union Budgets. These include removal of long-term capital gains tax on certain equity schemes, introduction of Securities Transaction Tax, regular changes in the tax treatment for debt funds, etc. Currently, there are two areas within the realm of equity investments where certain changes could be brought about : 1. The tax treatment of Indian equity Fund-Of-Funds (FOFs) :This is a unique case where the final product is less than the sum of its parts. Despite all the schemes contained within the FOF, satisfying the definition of 'Indian equity-oriented schemes', the FOF scheme per se, is treated like a debt fund scheme for the tax purposes. I agree that there are some FOFs which include other asset classes, viz. debt and gold, but even in these, the monthly average equity component usually exceed 65%. Hence, harmonisation of tax treatment would be welcome. Of course, this is not a new demand. The industry has been seeking this for the past few years. 2. The annuity earned from the equity oriented option within the new Pension Scheme (NPS) :There is strong demand to exempt the post-retirement annuity earned under NPS. Of course, it would be nice if this happens. However, in order to encourage investors to choose the equity oriented option (a.k.a. 'E' option) over the debt-oriented ones ('C' and 'G' options), the Hon'ble Finance Minister could stipulate that only annuity earned from the accumulated corpus of this option would be tax free. While this appears to be discriminatory, the purpose would be to make investors view equity as a preferred vehicle for retirement. Alternatively, he could stipulate that the additional tax benefit of Rs. 50000/- u/s 80CCD(1B) will only be available if it is invested in the 'E' option. Finally, I hope that that there is no re-imposition of long-term capital gains tax on Indian equity schemes nor further inimical tax treatment for debt funds. Frankly, with each passing year, there are fewer industry-related issues that the Union Budget can resolve. Often, key structural changes occur outside the Budget framework. However, in a broad sense, a sagacious Union Budget 2016 will help bolster investor sentiment, which in turn is good for the mutual fund industry in general. Views are personal