No retro tax on debt schemes: MFs say relief only partial, will not help industry

New Delhi - Mutual fund industry has termed as ‘partial relief’ the government’s decision to exempt debt mutual funds sold between April 1 and July 10 this year from an increased tax rate.

Earlier this month, the Union budget had proposed doubling of the long-term capital gain tax on debt-oriented mutual fund to 20 per cent with effect April 1, 2014.

Following representations from market participants, Sebi, Amfi and Members of Parliament, Finance Minister Arun Jaitley in Lok Sabha said high tax rate of 20 percent on the debt mutual fund will apply from July 10, the date of the presentation of the budget, and not from April 1, 2014 as
proposed earlier.

“Its a mixed bag. We welcome the step but its a partial relief. The new tax regime will not apply to investors who undertook transaction of sale of units between April 1 and July 10,” Axis Mutual Fund Managing Director and Chief Executive Officer Chandresh Nigam said.

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He further said that retrospective apply at the time of purchase not at the time of sale, those investors who have bought these units in anticipation of tax benefits will have to re-look their portfolios.

Echoing a similar view, LIC Nomura MF Senior Fund Manager Kilol Pandya said: “Its just a marginal relief. This is not going to help the industry incrementally.”

The Finance Minister said that new tax regime on debt mutual funds will not be applicable for units sold (not purchased) between April 1 and July 10.

Jaitley in his maiden Budget had proposed to increase the long-term capital gain tax on debt mutual funds from 10 percent to 20 percent. He also increased the minimum holding period for debt mutual funds to qualify for long-term capital gains tax to 36 months, from 12 months at present.

The move is part of government’s effort to bring parity with banks and other debt instruments. In the case of debt mutual funds, the Minister had said that capital gains arising on transfer of units held for more than a year is taxed at a concessional rate of 10 percent, whereas direct investments in banks and other debt instruments attract a higher rate of tax. This allows tax arbitrageopportunity.

This arbitrage has hardly benefited retail investors as their percentage is very small among such mutual fund investors, Jaitley had said in the budget speech.

Earlier, the mutual fund industry has protested against the budget proposal saying the new tax regime will hurt the industry as majority of assets under management comes under the debt category.

Commenting on the development, SBI MF Managing Director and CEO Dinesh Khara told PTI that “all such investors who have redeemed their investment in debt mutual fund until July 10 will be covered by the provisions of the previous Finance Act as regards to long-term capital gains are concerned.”

As far as the provisions by long-term capital gains are concerned, the period of investment will be 36 months as per the new Finance Act as against more than 12 months under the previous Act, he added.

“It’s a welcome move as there will be no retrospective tax in the case of debt mutual funds which have been redeemed before July 10,” Sundaram Mutual Deputy CEO Sunil Subramaniam said.

“However, it should be applicable even for those investors who have already invested before July 10 when the tax regime was different, he added.

“Only those existing investors have got some relief whose MF investments came for maturity before July 10. But there is no clarification for the new investors and equity fund of funds,” Quantum AMC CEO Jimmy Patel said.

“We have demanded that equity fund of funds be classified as equity funds rather than debt MFs,” he added.

PTI