Budget 2022 expectations: MF trade body seeks parity with ULIPs, permission for pension schemes and debt tax-saving funds

Mutual fund industry body AMFI has released a list of proposals for the government to consider ahead of Union Budget 2022. The suggestions include uniformity in taxation, changes in tax deduction at source (TDS) rules and product-specific relaxations, among others.

Correct the income-tax anomalies

AMFI has requested for uniform tax treatment on capital gains from mutual fund investments and unit-linked insurance plans. “Finance Act 2021 removed the benefits of Section 10(10D) in cases where the premium exceeds Rs 2.50 lakh. However, there is still no parity of tax treatment between Mutual Fund Units and ULIPs,” AMFI says.

If your annual ULIP premium is less than Rs 2.5 lakh, then your proceeds are tax-free. However, irrespective of your investment amount in a mutual fund scheme, withdrawals are subject to the usual capital gains tax rules.

Similarly, switches between growth and dividend plans or between regular and direct plans must not attract any capital gains tax, says AMFI. At present, such switches are classified as  sale and attract capital gains tax. AMFI points out that a switch from one investment plan to another under the same ULIP is not considered a sale of units. Since both mutual funds and ULIPs invest in securities and are investment products, there is a need for bringing in uniformity in taxation rules.

The trade body has also asked for clarity on tax exemption in the case of consolidation of scheme options. As of now, the receipt of units of a scheme by an investor on account of scheme mergers is not considered as switch and there is no tax-liability.

However, many mutual fund schemes have options under a single plan. For example, dividend plan of a mutual fund scheme has options such as daily dividend, weekly dividend and monthly dividend. AMFI has sought clarification if consolidation of such options would be tax neutral for the investors.

Make ETFs tax-friendly

AMFI wants the policy makers to make ETFs more attractive. Among exchange traded funds, the gains realized on sale of units of debt, gold & silver ETF held for one year should be considered as long term capital gains (LTCG) and taxed accordingly, it says. As per the current tax regime, to be eligible for lower rate of taxation offered by LTCG rules, the investor has to hold on to these for at least three years.

AMFI has also proposed introducing level playing field on the taxation of gains on listed debt securities and debt mutual funds. As per current rules, profits booked on sale of bonds held for more than one year are considered long term gains and taxed at 10 percent. Gains made on units of debt funds held for three years are treated as long term capital gains and taxed at 20 percent with indexation benefits.

“The holding period for long-term capital gains for direct investment in listed debt securities / and Zero-Coupon Bonds (listed or unlisted) and for investment through debt mutual funds should be harmonized and made uniform. This may be done by bringing the two at par in either by – (i) treating investments in non-equity oriented mutual fund schemes which invest 65 percent or more in listed debt securities as long term, if they are held for more than 12 months OR (ii) increasing the minimum holding period for direct investment in listed debt securities / and Zero-Coupon Bonds (listed or unlisted) to 36 months to qualify as long-term capital asset,” AMFI says.

Debt funds with Section 80C tax benefits

The industry body says that even debt funds should be allowed Section 80C income-tax deduction benefits as equity linked saving scheme (ELSS) give. AMFI has requested approval for launch of DLSS – debt linked saving schemes. DLSS may be given a lock-in period of, say, five years, in line with tax-saving bank fixed deposits.

SEBI registered mutual funds should be allowed to launch pension-oriented schemes. Since this product is targeted at funding the retirement corpus, there is a demand to provide tax incentives in line with those enjoyed by the National Pension Scheme (NPS). Also, withdrawals of up to 60 percent of the corpus should be tax free at the time of opting out of the scheme.

NHAI and REC bonds are used to reduce tax on capital gains from sale of long-term assets. AMFI has proposed that investments in units of infrastructure mutual funds – both equity and debt – be allowed to seek exemption under section 54EC.

Making TDS less tedious

Interest income earned from bank fixed deposits in excess of Rs 40,000 attracts Tax Deducted at Source (TDS). However, if you receive mutual fund dividends, then any dividend income in excess of Rs 5,000  attracts TDS.

In fact, Budget 2021 had raised the threshold limit for TDS on interest on deposits from Rs 10,000 to Rs 40,000. Now, AMFI wants the TDS threshold limit increased to Rs 50,000 on dividends paid out by mutual fund schemes.