Mutual Fund industry seeks tax parity with ULIPs in Budget 2024

FM Nirmala Sitaraman

Asset Management Companies are hoping that the Finance Minister will address the disparity in tax treatment between equity mutual funds and Unit Linked Insurance Plans (ULIPs). Plus, the mutual fund industry is also seeking a level playing field between foreign portfolio investors (FPIs) and foreign investors investing in Indian AIFs.

Finance Minister Nirmala Sitharaman will announce the Budget for FY24-25 on July 23.

Christy Mathai, fund manager at Quantum Mutual Fund said that the tax rates for both ULIPs and equity mutual funds should be the same because ULIPs are essentially investment products providing some risk cover.
Currently, the returns are not taxed for ULIPs, if the annual premium is less than Rs 2.5 lakh.

The government should also revise the definition of equity-oriented mutual fund schemes to include equity Fund of Fund (FoF) schemes, said Mathai. He said that Equity FoFs should be treated on par with equity-oriented mutual funds for taxation purposes. Currently, equity FoFs are classified as debt-oriented for tax purposes.

Vinod Joseph of Economic Laws Practice said that there should be tax parity for investments made by foreign investors through the FPI route, and the investments made through Indian Alternate Investment Funds(AIFs). FPIs benefit from Double Tax Avoidance Agreements (DTAs) because they are often based in tax-friendly jurisdictions like Mauritius and Singapore. Joseph said that when an Indian AIF tries to raise money from overseas investors their biggest competitor is an FPI. So, if overseas investors want to invest in Indian equities, they can do it as an FPI or via an AIF. But they go for the former route because of tax benefits due to DTA.

He also suggested that the pass-through status should be extended to category 3 AIFs, ensuring that business income is taxed only in the hands of the investors, not the fund.

Sector performance:

Over the past year, asset management companies (AMCs) have seen their margins expand due to a better equity mix, driven by the growth in equity markets. Investors preferred equity mutual funds over debt and other categories, leading to steady inflows into equity mutual funds. In June, Systematic Investment Plans (SIPs) surpassed Rs 21,000 crore. New fund offers (NFOs) are also attracting significant inflows. According to the latest AMFI data for June 2024, NFO equity inflows (active) surged 54.1 percent month-on-month to Rs 151.4 billion.

Analyst are however saying that valuations appear to be expensive in the AMC pack. AMCs trade at a 40-50 percent premium to broader markets, said Kotak Institutional Equities in a report. The brokerage firm said that while AMCs have strong cash flows and growth potential, their profits can be affected by occasional market downturns. Despite stronger markets benefitting AUM growth for all AMCs, markets do not reward this in terms of earnings multiples, said the brokerage firm.

Mathai said that at one point of time the inflows would reduce and then the current valuation would not be justified, leading to de-rating. Jignesh Shial of Incred Capital said the HDFC AMC appears to be overvalued, whereas other companies in the sector still show potential for growth in comparison.

The stocks that are likely to be impacted by any announcement in the sector are HDFC AMC, UTI AMC, Nippon Life India Asset Management, and Aditya Birla Sun Life AMC.

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