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Greed and fear grips mutual funds ahead of Budget

Once again there are rumours that long-term capital gains tax on equity will be imposed; either the zero rate will be abolished or the time limit will be increased

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It may not show on the surface immediately, but the Rs 22-lakh crore Indian mutual fund industry is a little nervous ahead of the PM Modi-led government's last full Budget before the 2019 general elections.

Any unexpected tinkering with tax rates can upset the apple cart for mutual funds, which have attracted massive inflows amid falling returns from bank fixed deposits.

Industry experts told DNA Money that even a status-quo is okay for the industry. A dream Budget would be one where the MF industry is allowed additional routes to channelise household savings.

In the past few Budgets, the government in a sense has spared the MF industry in terms of any big negatives, although some tweaks have hit debt funds. For fund houses, simplification of goods and services tax (GST) rules, of course, can ease the implementation of the tax reform, especially at the foot-soldier level i.e., MF agents and advisors.

Industry lobby body Association of Mutual Funds in India (Amfi) has suggested over half a dozen specific changes to the GST implementation, said an official. Proposals include exemption from need of invoice from each MF distributor, reverse charge exemption be continued beyond March 2018 and reduced invoice matching requirements in GSTN portal.

Onerous GST requirements are taking up a lot of time for the foot-soldiers, who should be chasing business, added the official.

Some help on attracting more long-term inflows is warranted. Chandresh Nigam, MD & CEO, Axis Mutual Fund, said, "From an MF industry perspective, we have pretty clean and largely stable tax architecture, and honestly, no real significant changes are needed. Of course, there are a few areas where changes will help. The most significant is the broadening of the definition of retirement savings products that are eligible for benefits under Section 80 CCD to include mutual fund products as well."

Clarifications on Mutual Fund Long Term Retirement Plan (MFLRP), similar to the 401(k) plan in the US, will aid in mopping up funds and create a clear vehicle for retirement. Guidance on how MFLRP can function is being eyed, said a senior mutual fund industry executive.

The real worry is elsewhere. With the Union Budget approaching, once again there are rumours that long-term capital gains (LTCG) tax on equity will be imposed. Either the zero rate will be abolished or the time limit will be increased. An increase from one year to three will worry serious investors, and by extension, mutual funds.

Nilesh Shah, MD, Kotak Mutual Fund said, "The tax exemption (LTCG) has led to better market participation. We honestly don't want any tinkering with it."

In nine months of the ongoing fiscal, pure equity MFs have garnered Rs 1.25 lakh crore as net inflows, almost three times the amount raised in the corresponding period previous year. This is why no change in equity MF taxation will be good news for fund houses.

Fund officials are pushing the case for extending Section 54 EC benefit for mutual fund schemes with a lock-in period of three to five years.

A Balasubramanian, CEO, Aditya Birla Sun Life MF said, "Allowing the MF investments to be invested under the Section 54EC will be good. This will help investors who have been divesting their real estate assets and then investing those proceeds into the mutual funds." At present, the options for investment of long-term capital gains for availing tax deduction under Section 54EC are limited to capital gain bonds issued by NHAI and REC or any other notified bonds.

STORY SO FAR

  • 2017 - Provides better clarity on mutual fund scheme mergers; no more deductions for RGESS
     
  • 2016 - Exempts service tax levied on MF agents earning less than Rs 10 lakh commission annually
     
  • 2015 - Increases surcharge on the dividend distribution tax on debt funds to 12%
     
  • 2014 - Raises the threshold to claim long-term capital gains tax on debt fund investments to 3 years
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