Tax sops for debt funds on cards

In order to improve retail participation in the debt market, the Centre is mulling giving tax concessions similar to those that equity investors enjoy for investing in debt mutual funds.

“On the face of it, it looks very odd that government promotes corporate instruments and gives tax concession, but for their own instrument there are no tax concessions,” said H R Khan (pictured), deputy governor, Reserve Bank of India (RBI). He was addressing a conference organised by Assocham.

He pointed out that equity mutual fund has no dividend distribution tax and short term tax whereas in debt mutual fund there are taxes. Presently, the dividend distribution tax on debt funds is at 12.5%.

He added that “there should be level playing field for debt and equity mutual funds.”

He said that the suggestion is being considered by the government. The centre is also working on consolidating the number of government bonds in the market.

Khan said there are many papers in small lots and reducing them would help increase the trading volumes and also increase more active points on the yield curve. The discussions are at an advanced stage, he said.

The RBI is also working on reducing the minimum requirement of HTM for banks’ in a non-disruptive and a phased manner. At present, banks are mandated to keep at least 25% of government bonds in HTM category.

In terms of liquidity tightness, Khan said that it was because of high government cash balances which were above Rs1 lakh crore till few days back.

Banks have been borrowing Rs1 lakh crore every day from RBI’s repo window lately reflecting the strain on liquidity.