Make debt fund dividends tax-free: What retail investors want from Budget

By Vikaas Sachdeva

 There are a couple of expectations from the budget from the point of view of retail investors:

Include Mutual Funds in Section 54EC: At present, Section 54EC of the Income Tax Act lists the cases in which capital gains tax from long-term assets (held for more than three years) need not be charged, if the gains are invested in certain specified areas. Currently, mutual funds are not included among these specified assets that include bonds issued by National Bank for Agriculture and Rural Development (NABARD), National Highways Authority of India, National Housing Bank, etc.

This will allow the flow of long-term money in the industry wherein open-end equity funds would have subscriptions locked in for a reasonably long period of time.

Make debt fund dividends tax-free: Retail investors would get more leg room if dividends from debt funds were made tax-free up to an investment amount of Rs. two lakh. While dividends are not taxed for equity schemes, they are taxed in debt funds through a dividend distribution tax, usually 26 percent that a mutual fund company has to pay before distributing this income to its investors.

From an institutional point of view, one would like to see the following steps being taken in the budget:

Sanction PPFs to invest in equities: While PPFs are among the steadiest of fixed income instruments in terms of returns, the decision to sanction provident funds to invest in equities has been given the go-ahead by the Ministry of Finance, but has not been cleared by the Labour Ministry so far. Making it mandatory to invest in equities, starting with passive instruments like ETFs, would provide a source of stable, long-term money to the capital markets

Disinvestments in ETFs: The government should look at democratizing the ownership of equity assets through use of ETFs for disinvestment. Not only do ETFs allow flexibility in terms of structure, they are also acceptable to the retail investors as has been seen in the case of CPSE. ETFs provide multiple security layers, greater risk adjustment, more market relevance and are more effective than a single stock. The enhanced participation creates a delta of growth for the ETF industry.

Classify ETFs as listed securities: Another way to give index funds a fillip is to classify fixed income ETFs as listed debt securities to provide more depth to the fixed income market, rather than trading in a single stock. Along with ETFs, the budget could also look at classifying exchange traded notes (ETNs) –debt securities liked to the return of a benchmark index – as listed debt securities.

(The author is Chief Executive Officer, Edelweiss Asset Management Limited)