The government should treat a mutual fund scheme, an insurance product or even a bank deposit in a similar way for taxation if these products serve the same purpose.
This was the crux of the budget wish list that financial market representatives gave to the government during a meeting with the finance minister on November 22.
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Market participants said there was a need to harmonise tax rules on different financial products. Some of the proposals included tax exemption for mutual fund schemes that closely resemble insurance unit-linked insurance plans (ULIPs) and pension products, according to people aware of the discussions.
“People do not invest for mere returns but specifically for post-tax returns. So in that sense, products that serve the same purpose, say retirement or annuity, should be treated the same when considered for taxation,” said a market participant aware of the discussions.
One of the key asks from mutual fund houses was the inclusion of retirement schemes for tax exemption under Section 80C of the Income Tax Act. Currently, investments in insurance products including market-linked ones, pension funds, the National Pension System (NPS), and equity-linked savings schemes (ELSS) of fund houses are included for exemption.
Debt-oriented schemes
The total exemption limit under this section is Rs 1,50,000 for individuals and an additional Rs 50,000 for NPS.
Insurance companies rely heavily on tax exemptions to attract investments in their policies. Insurance is a push-product, or in other words, an expense.
Typically, business growth for insurance firms in terms of policies sold surges during the fourth quarter of the financial year as Indians rush to meet tax exemption deadlines. Similarly, ELSS funds see a surge in inflows ahead of tax deadlines.
Fund houses also want to be allowed to float debt-oriented schemes on the lines of ELSS for tax-saving purposes.
“Fixed income products would do well when it comes to taxation as they offer a stable return. If such products are given the added benefit of exemption, we can see a good amount of investment coming in,” said a fund manager requesting anonymity.
Market participants asked for a streamlined and unified know-your-customer (KYC) process for all financial products. Banks in India largely carry out the KYC given that most Indians tend to have a bank account before investing in any other financial product.
Insurance companies rely on bank KYC, especially when the distributor of their products is a bank partner. Market participants said a single point of KYC (preferably the bank) can be relied upon and the process need not be repeated for other products. This would bring down the cost of service for insurance companies and mutual fund houses.
The pre-budget consultations are carried out by the finance minister ahead of the Union Budget to assess the expectations of stakeholders in the economy. Finance minister Nirmala Sitharaman has met with representatives of financial institutions, agriculture outfits, and industry bodies to gauge expectations.
Sitharaman is expected to meet representatives of the services sector including health and education on November 24.
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