Budget 2017: Investments in tax saving mutual funds should get more tax sops

Prashasta SethIIFL AMCThe government’s focus on increasing financial inclusion of the citizens is in the right direction to take India to the next level. Currently in India the participation of citizens in the financial markets is abysmally low which has the potential to improve drastically if given the right push from the government. The demonetization impact would be seen to a large extent on the people’s perception of traditional ‘safe investment’ options of gold and real estate and we could see good flows into financial markets through mutual fund route. However, there are various short comings in the current tax structure which needs to be changed in order to attract more funds into the mutual fund industry. Some key expectations of the industry from the current budget would be as follows:a) Additional deduction for ELSS: In order to channelize long-term savings of retail investors into capital markets, the government should allow investment into tax saving MF schemes (ELSS) as an additional deduction of Rs 50,000 under Sec.80C (over and above the existing limit of Rs 1,50,000) with an enabling provision to allow the tax payer to utilize any unutilized amount within the limit of Rs 1,50,000 under section 80C of Income Tax (I-T) Act, 1961. b) Ease of switching between schemes: Currently switching from one option to another option even though within same mutual fund scheme is considered as “transfer” as per I-T act 1961 and is liable to capital gain tax. Since its intra scheme switch within same scheme it should not be regarded as “transfer” and should be exempt from capital gain tax.c) Removing STT on mutual fund unit transactions: Currently, equity mutual funds are required to pay STT when they redeem units of mutual funds. There are a few problems with this arrangement. Firstly, when mutual funds buy and sell shares in the market, they have already paid the STT on the transactions. Therefore, again imposing STT on unit-holders when they redeem these units is tantamount to double taxation. Secondly, mutual funds are a popular route for the retail and small investors to participate in the equity markets indirectly. At least, to encourage greater retail participation in the equity markets via mutual funds, the government can scrap STT on redemption of mutual fund units.d) Tax benefits for infrastructure debt funds: Infrastructure debt funds promoted by mutual funds should be given some tax benefits, either by affording them the status of Section 80C instruments or by allowing lower capital gains tax. Infrastructure debt funds would get investments from institutional investors, and would invest the same in infrastructure projects. Given how crucial infrastructure is for the growth of the country, any encouragement to infrastructure funding and spending is going to help the sector.e) At par treatment for ‘Fund of funds’ (FOF): There are various FOF which invest in overseas managed mutual funds. Investment in equity FOF is treated as debt investment and taxed accordingly. So, while an equity fund enjoys a lower short-term capital gains tax and no long-term capital gains tax, investors investing in an equity FOF have to pay both a higher short-term and a long-term capital gains tax. Since, investors would like to diversify their equity portfolio by investing in equities of other countries, they should not be deprived of the tax benefits of equity funds.