Mutual fund industry pushes for LTCG tax exemption on shares, equity funds after 3 years

Finance Minister Nirmala Sitharaman will announce the budget on July 23..

Long-Term Capital Gains on listed shares or units of equity-oriented fund schemes held for more than one year and up to three years should be subjected to tax at the rate of 10 percent on capital gains exceeding Rs 2 lakh in a financial year, the Association of Mutual Funds of India (AMFI) has suggested for the upcoming budget. Further, gains from such assets if held more than three years should be exempted from capital gains tax.

Finance Minister Nirmala Sitharaman will announce the first Budget of the third term of the Bharatiya Janata Party or BJP-led National Democratic Alliance (NDA) government on July 23.

The industry body has made 13 suggestions to the government under direct tax proposals and here’s how some of them, if implemented, will help mutual fund investors.

Taxability of long-term capital gains

AMFI has suggested that the LTCG on listed equity shares or units of equity-oriented fund schemes, held for more than one year and up to three years be subjected to LTCG tax at the rate of 10 percent on capital gains exceeding Rs 2 lakh in a financial year. Further, gains from such assets if held more than three years should be exempted from capital gains tax.

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Currently, equity shares or units of equity funds held for more than a year are subject to capital gains tax at 10 percent if LTCG exceeds Rs 1 lakh in a financial year.

Exemption from capital tax after three years holding period is expected to encourage long-term investments in equities.

Tax concessions in debt mutual funds

AMFI has requested that capital gains on redemption of units of debt-oriented mutual funds held for more than three years should be taxed at the rate of 10 percent without indexation.

According to the amendments to the Finance Bill on March 24, 2023, gains from funds with less than 35 percent of their assets in equities do not offer LTCG tax and indexation benefits. Irrespective of when you sell these units, they are added to your income and taxed at your income-tax rates.

Earlier, gains from investments in debt funds – if units were held for more than three years – were subject to the LTCG tax rate of 20 percent, after indexation.

According to experts, this has impacted the appeal of debt funds to an extent.

Active participation by retail investors in debt markets which will not only help them in diversifying their investments but also in garnering inflation-adjusted returns.

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Relief for fund of funds, overseas funds

The industry body has suggested that the definition of “Equity Oriented Funds” (EOFs) be revised to include investment in Fund of Funds (FoFs) schemes which invest a minimum of 90 percent of the corpus in units of Equity Oriented Mutual Fund Schemes, which in turn invest a minimum 65 percent in equity shares of domestic companies listed on a recognised stock exchange.

This is expected to help investors because then redemption of units in FOF schemes investing 90 percent or more in EOF would be subjected to the same capital gains tax, as applicable to sale of listed equity securities or units of equity mutual funds.

Currently, despite FOFs investing in equity securities of domestic companies via EOFs, short-term and long-term gains from these funds get taxed as non-equity oriented mutual fund schemes.

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Further, it has also requested the necessary changes in the Finance Act so that gains from investing in overseas mutual funds or ETFs through equity Fund of Funds (FoF) are not considered as short-term capital gains, despite the holding period, which has made these investments less attractive over the past year.

Parity in taxation on commodity funds

Currently, commodity Exchange-Traded Funds (ETFs) and FoFs such as gold/silver ETFs and gold fund of funds that invest 90 percent or more in units of fold ETFs are classified under non-equity instruments. Hence, they are taxed as per the debt category.

The current tax regime makes the ETFs/ mutual fund schemes that have underlying investments in a commodity such as gold and silver unattractive to investors.

AMFI has requested that such funds should be taxed in accordance with capital gains taxation on the underlying commodity and not as debt or ‘non-equity’ instruments.

Pension MF schemes with uniform tax treatment as NPS

There is a suggestion that mutual funds be allowed to launch pension-oriented schemes, namely, ‘Mutual Fund Linked Retirement Scheme’ (MFLRS), with similar tax benefits as applicable to NPS such as Exempt-Exempt-Exempt (E-E-E) status on the principle of similar tax treatment for similar products.

In other words, it has been proposed that the tax treatment for NPS and Retirement/Pension oriented schemes launched by Mutual Funds should be aligned by bringing the latter also under Section 80CCD of Income-Tax Act, 1961, considering that the characteristics of both are similar.

As an employee, your contributions of up to 10 percent of your basic salary plus dearness allowance will qualify for deductions under Section 80CCD (1).

Allowing mutual funds to launch MFLRS can bring pension benefits to millions of Indians in the unorganised sector.

Increase in threshold limit of withholding tax

Presently, withholding tax (TDS) is applicable on income distribution by mutual fund schemes to resident investors, where the aggregate of the amounts of such income distribution exceeds Rs 5,000.

According to AMFI, this has been causing hardship to retail investors, especially for individuals in the lower income bracket.

The industry body has requested that the threshold limit for withholding tax (TDS) on income distribution (dividend) on mutual fund units be increased from Rs 5,000 to Rs 50,000 per annum.

Introduce Debt Linked Savings Scheme

A Debt Linked Savings Scheme (DLSS) on the lines of Equity Linked Savings Scheme (ELSS) can help channelise long-term savings of retail investors into higher credit-rated debt instruments with appropriate tax benefits, which will in turn help in deepening the Indian Bond Market.

AMFI has also requested that the investments up to Rs 1.50 lakh under DLSS be eligible for tax benefits under a separate sub-section and subject to a lock in period of 5 years.

Also, there is suggestion that the government should remove the current stipulation that investments in ELSS funds should be multiples of Rs 500 and permit investments of any amount, subject to a minimum of Rs 500.