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Last Updated : Feb 22, 2016 09:22 AM IST | Source: Moneycontrol.com

Budget 2016: Tax on capital gain in MF should be rationalised says Union KBC

Be it the rate at which the short term capital gain is taxed, or the differential treatment a debt security and a debt mutual fund gets, such anomalies should be removed by Union Budget 2016, says Union KBC MF.

G Pradeepkumar
Union KBC Mutual Fund

It is common knowledge that our capital markets are heavily influenced by flows from foreign Institutional Investors (FIIs). In order to give more depth and stability to the market, it is important to encourage a significantly higher level of retail participation in mutual fund schemes. A stable equity market will in turn attract more retail investors and form a virtuous cycle. Our wish list from the Union Budget 2016 to be declared on 29th February is as follows:

Changes under section 80 C

At present, Equity Linked Savings Schemes (ELSS) are eligible for tax exemption under section 80C upto Rs 1,50,000. However, since this section is overcrowded with a number of other options, investments in ELSS have been far below potential. It would be extremely helpful for the salaried class if a separate subsection of Rs 50,000 for ELSS can be carved out under section 80C while retaining the existing limit of Rs 1,50,000 along with other eligible instruments. At present, investments under National Pension Scheme (NPS) qualifies for tax exemption under section 80CCD while retirement benefit / pension plans offered by mutual funds are clubbed with many other instruments under section 80C. There is a strong case to include such retirement benefit / pension plans under section 80CCD to encourage retirement savings among retail investors.

Change in treatment to Dividend Distribution Tax

Further, dividend in debt mutual funds should not be taxed at the mutual fund level and further, in the hands of the investor, it should be considered similar to saving bank interest for taxation. Interest upto Rs 10,000 per annum from savings bank account is exempted under section 80TTA. Similar treatment may be given to dividend from debt mutual funds. The same has also been highlighted by the income tax simplification committee.

Rationalising Short Term Capital Gain (STCG) tax on Equity shares and Equity Mutual fund

The government had introduced a concessional STCG Tax @ 15% in respect of equity shares and equity oriented units of mutual fund. However, this concession rate provides benefit to individuals who fall under 20% and 30% tax bracket. For a person in 10% tax slab the flat rate of @ 15% on such short term capital gains is meaningless. Hence, instead of flat 15%, concession rate may be redefined as 50% of the applicable tax slab.

Mutual Funds should be considered for Long Term Capital Gains (LTCG) arising out of Long term assets

Mutual fund units that are subject to a lock in period of three years may be included along with bonds issued by NABARD and NHAI among the specified long-term assets qualifying for exemption on LTCG under Sec. 54 EC. Capital gains arising from sale of property may be allowed to be invested in mutual funds for parking till the time the individual is able to find another property to invest in, or one year from the time of the sale of property, whichever is earlier.

Notional loss of capital due to dividend declared

Capital loss in a mutual fund scheme on account of dividend declaration should not be considered for set off against any capital gains. This is required to prevent possible misuse of the dividend stripping through mutual fund scheme.

Parity in tax of Debt securities and Debt Mutual Fund

In the last Budget, the minimum holding period for debt mutual funds to qualify for long term capital gains tax was increased from one year to three years. However, direct investment in debt securities continue to have minimum holding period of one year to qualify for long term capital gains tax. This anomaly can be avoided by increasing the minimum holding period to 36 months in the case of debt securities also for the purpose of long term capital gains tax.

Service Tax on brokerage

There is a need to provide exemption of service tax for brokerage on distribution of mutual funds as the retail penetration of mutual funds is very low in India as compared to developed countries and it is important to have more distributors who are active in generating retail sales. Alternatively, the reverse charge should be withdrawn by putting the onus of payment of service tax on services provided or agreed to be provided by a mutual fund agent or distributor, from the mutual fund / asset management company under reverse charge mechanism, back to the mutual fund distributors (as was the case prior to 2005), which would at least allow the small distributor to take the benefit of basic exemption limit of Rs. 10 Lakhs.

Exemption from Capital Gains Tax for intra scheme switches

At present, capital gains tax is levied on consolidation/merger of multiple plans within a mutual fund scheme. It is illogical to levy capital gains tax when an investor moves from say, dividend option to growth option in a scheme. The government must include this within the definition of consolidation/merger of multiple schemes which are not subject to taxation.

Similar products should be taxed similarly

Based on the principle that similar products should receive similar tax treatment, direct equity, equity oriented schemes and fund of funds investing predominantly in equity funds. Fund of funds investing majorly in equity mutual funds should be considered for equity mutual fund taxation.

The views expressed or statements made in this document are purely the views of the author and do not necessarily represent the views of either the Company or its affiliates.

First Published on Feb 18, 2016 06:19 pm