Budget 2022: Four areas in personal finance Nirmala Sitharaman can focus on to generate more fund flows

Union Budget 2022-23: Taxpayers want lower taxes, investors want more reforms and the industry wants more tax deductions for the services it offers

Viral Bhatt January 25, 2022 11:10:16 IST
Budget 2022: Four areas in personal finance Nirmala Sitharaman can focus on to generate more fund flows

Indian Union Budget 2022: File image of Finance Minister Nirmala Sitharaman posing for pictures ahead of presenting the annual budget in Parliament. AFP

The Budget wishlist of taxpayers, investors, and even the financial services industry has not changed much in the past few years. Taxpayers want lower taxes, investors want more reforms and the industry wants more tax deductions for the services it offers. However, meeting these expectations will be difficult for a government struggling to bring the economy back on track.

The four areas that the government may focus on in the upcoming Union Budget 2022 for the personal finance industry includes the following:

1) Bring parity in tax treatment for investments in different financial sectors

Currently, the minimum holding period for Units of debt-oriented mutual funds (listed or unlisted) to qualify as Long-Term Capital Asset is 36 months. However, for direct investments in listed securities such as bonds/debentures, Government Securities, derivatives, etc. listed on a recognised stock exchange in India and Zero-Coupon Bonds (listed or unlisted) the holding period to qualify as Long Term Capital Asset is only 12 months.

The holding period for long-term capital gains for direct investment in listed debt securities / and Zero-Coupon Bonds (listed or unlisted) and for investment through debt mutual funds should be harmonised and made uniform. This may be done by bringing the two at par in either by:

(i) treating investments in non-equity oriented mutual fund schemes which invest 65 percent or more in listed debt securities as long term, if they are held for more than 12 months, or

(ii) increasing the minimum holding period for direct investment in listed debt securities / and Zero-Coupon Bonds (listed or unlisted) to 36 months to qualify as Long-Term Capital Asset.

Reason: It is only logical and fair to bring parity in tax treatment for direct investment in listed debt securities and indirect investment in the same instruments through debt-oriented mutual fund schemes. This parity between direct investments in listed security (by corporates & HNIs) and indirect investments made through mutual funds by retail investors would also prevent tax revenue leakage.

2) Introduce Debt Linked Savings Scheme (DLSS) to help deepen Bond market

Over the past decade, India has emerged as one of the key financial markets in Asia. However, the Indian corporate bond market has remained comparatively small and shallow. There is an over-dependence on banks for finance, which hampers companies needing access to low-cost finance. Indian banks are currently in no position to expand their lending portfolios till they sort out the existing bad loans problem, especially post COVID-19 pandemic. The heavy demands on bank funds by large companies, in effect, crowd out small enterprises from funding.

It is proposed to introduce Debt Linked Savings Scheme (DLSS) on the lines of Equity Linked Savings Scheme (ELSS) to channelize long-term savings of retail investors into higher credit-rated debt instruments with appropriate tax benefits which will help in deepening the Indian Bond Market.

Reason: A similar stimulus through the introduction of DLSS would help channelize household savings into the bond market and help deepen the bond market.

3) Mutual Funds should be allowed to launch pension-oriented MF schemes (MFLRS) with uniform tax Treatment as NPS

Long-Term Capital Gains (LTCG) arising out of the sale of listed equity shares and units of equity-oriented mutual fund schemes are now taxed at the rate of 10 percent, if the LTCG exceeds Rs 1 lakh in a financial year (gains up to 31 January 2018 is grandfathered).

It is proposed to bring parity in tax treatment in respect of capital gains on withdrawal of investments in ULIPs of Life Insurance companies and redemption of Mutual Funds Units, so as to bring about level playing field between ULIPs and MF schemes.

Reason: SEBI, in its Long Term Policy for Mutual Funds, published a few years ago, had emphasized that similar products should get similar tax treatment, and the need to eliminate tax arbitrage that results in launching similar products under the supervision of different regulators.

4) Mutual Fund Units should be notified as ‘Specified Long-Term Assets’ qualifying for exemption on LTCG

In 1996, Sections 54EA and 54EB were introduced under the Income Tax Act, 1961 that allowed capital gains tax exemption for investments in specified assets, including mutual fund units, with a view to channelise investment into priority sectors of the economy and to give impetus to the capital markets.

However, Sec. 54EA and 54EB were withdrawn in the Union Budget 2000-01 and a new Section 54EC was introduced, whereby tax exemption on long-term capital gains is allowed only if the gains are invested in specified long-term assets that are redeemable after three years, namely, the bonds issued by the NHAI & REC.

It is proposed that mutual fund units wherein the underlying investments are made into specified infrastructure sub-sector as may be notified by the Government of India, be also included in the list of the specified long-term assets under Sec. 54EC. Further, the aforesaid investment can have a lock-in period of three years to be eligible for exemption under Sec. 54EC.

Reason: The government’s plans to significantly increase investment in the infrastructure space will require massive funding and the banks may not be equipped to fund such investments and bonds issued by REC or NHAI may be inadequate. Investment in the specified mutual fund schemes can provide an alternative investment avenue in addition to existing options to the investors and also provide an option to earn market-related returns. It will also help ease the burden cost of borrowing for infrastructure funding on the Government.

Tax benefit under Sec. 54 EC for investment in the specified mutual fund scheme will help channelize the gains from the sale of immovable property into capital markets through the mutual fund route and bring greater depth to capital markets.

The writer is Founder, Money Mantra - a personal finance solutions firm.

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