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Union Budget 2023: Here are the AMFI wish list for the betterment of MF industry

One of the demands if for uniform taxation of capital gains from mutual funds and Unit-Linked Insurance Plans issued by insurance companies

January 10, 2023 / 08:39 AM IST
The Association of Mutual Funds In India (AMFI; the mutual fund industry's trade body) has unveiled a lengthy pre-budget wishlist including lower taxes and tax parity with other investments. AMFI also wants easier regulations for investors
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The Association of Mutual Funds In India (AMFI; the mutual fund industry's trade body) has unveiled a lengthy pre-budget wishlist including lower taxes and tax parity with other investments. AMFI also wants easier regulations for investors
Tax parity with insurance policies The mutual fund industry is seeking uniform taxation for capital gains from mutual funds and Unit-Linked Insurance Plans (ULIPs) issued by insurance companies. Compared to 10 percent tax payable on capital gains on equity mutual funds, gains from ULIP are tax-free if the sum assured is at least 10 times the premium paid, the money is withdrawn after a lock-in of five years and the premium paid is below Rs 2.5 lakh. In case of ULIPs, a switch from one option to another is not considered a capital gain. In the case of mutual funds, a shift from the growth option to dividend option or from regular plan to direct plan is considered a transfer and so attracts capital gains tax. AMFI wants the government to stop treating such shifts as transfers that attract a capital gains tax
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Tax parity with insurance policies
The mutual fund industry is seeking uniform taxation for capital gains from mutual funds and Unit-Linked Insurance Plans (ULIPs) issued by insurance companies. Compared to 10 percent tax payable on capital gains on equity mutual funds, gains from ULIP are tax-free if the sum assured is at least 10 times the premium paid, the money is withdrawn after a lock-in of five years and the premium paid is below Rs 2.5 lakh. In case of ULIPs, a switch from one option to another is not considered a capital gain. In the case of mutual funds, a shift from the growth option to dividend option or from regular plan to direct plan is considered a transfer and so attracts capital gains tax. AMFI wants the government to stop treating such shifts as transfers that attract a capital gains tax
Tax parity with listed bonds Similarly, listed debentures and zero coupon bonds are better placed when it comes to taxation. For example, gains on listed debentures attract Long-Term Capital Gains (LTCG) tax of 10 percent if held for more than 12 months whereas for debt mutual funds, LTCG works out to 20 percent if held for more than 36 months. In reality, both are debt instruments. AMFI has asked for parity in tax treatment of these two – direct investments in listed debt and debt mutual funds
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Tax parity with listed bonds
Similarly, listed debentures and zero coupon bonds are better placed when it comes to taxation. For example, gains on listed debentures attract Long-Term Capital Gains (LTCG) tax of 10 percent if held for more than 12 months whereas for debt mutual funds, LTCG works out to 20 percent if held for more than 36 months. In reality, both are debt instruments. AMFI has asked for parity in tax treatment of these two – direct investments in listed debt and debt mutual funds
Increase in the threshold limit for TDS Another key demand is an increase in the threshold limit for tax deducted at source in case of dividend payouts to Rs 50,000 from the current limit of Rs 5,000
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Increase in the threshold limit for TDS
Another key demand is an increase in the threshold limit for tax deducted at source in case of dividend payouts to Rs 50,000 from the current limit of Rs 5,000
Seeking clarity on scheme mergers When two schemes or two plans of an MF house are consolidated, the transfer of units is not considered a transfer for the purpose of tax. So no tax liability applies to the investor. The same treatment is not extended to consolidation of options under one scheme. For example, there are many schemes with options such as a daily dividend and weekly dividend. If the options are consolidated, a tax liability may apply. AMFI wants more clarity around this
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Seeking clarity on scheme mergers
When two schemes or two plans of an MF house are consolidated, the transfer of units is not considered a transfer for the purpose of tax. So no tax liability applies to the investor. The same treatment is not extended to consolidation of options under one scheme. For example, there are many schemes with options such as a daily dividend and weekly dividend. If the options are consolidated, a tax liability may apply. AMFI wants more clarity around this
Using residual money for tax-saving schemes Most investors wonder why investments in Equity-Linked Savings Schemes (ELSS) have to be in multiples of Rs 500. Because the rule says so. This rule comes back to haunt you if you enrol in a tax-saving mutual fund scheme through a systematic transfer plan (STP). An STP entails you to put a lumpsum in a liquid fund and then transfer an equal amount at regular intervals into a tax-saving scheme. But what happens if there is a residual amount left in the liquid fund after all your transfers are done? If the destination scheme is just about any equity fund, then there is no problem. You could simply shift the balance amount into that fund and be done with it. But not if it’s a tax-saving fund. Amounts remaining in the liquid fund below Rs 500 cannot be invested because you can only invest in an ELSS fund in multiples of Rs. 500. AMFI has now asked for a small change: a removal of the Rs 500 investment amount multiple. Since this is a tax-saving fund, the Central Board of Direct Taxes needs to effect the change
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Using residual money for tax-saving schemes
Most investors wonder why investments in Equity-Linked Savings Schemes (ELSS) have to be in multiples of Rs 500. Because the rule says so. This rule comes back to haunt you if you enrol in a tax-saving mutual fund scheme through a systematic transfer plan (STP). An STP entails you to put a lumpsum in a liquid fund and then transfer an equal amount at regular intervals into a tax-saving scheme. But what happens if there is a residual amount left in the liquid fund after all your transfers are done? If the destination scheme is just about any equity fund, then there is no problem. You could simply shift the balance amount into that fund and be done with it. But not if it’s a tax-saving fund. Amounts remaining in the liquid fund below Rs 500 cannot be invested because you can only invest in an ELSS fund in multiples of Rs. 500. AMFI has now asked for a small change: a removal of the Rs 500 investment amount multiple. Since this is a tax-saving fund, the Central Board of Direct Taxes needs to effect the change
Revising definition of equity FoF “It is proposed that the definition of ‘Equity Oriented Funds’ (EOF) be revised to include investment in Fund of Funds (FOF) schemes which invests a minimum of 90% of the corpus in units of Equity Oriented Mutual Fund Schemes, which in turn invest minimum 65% in equity shares of domestic companies listed on a recognised stock exchanges,” says AMFI. Put simply, the trade body wants schemes investing in mutual fund schemes with a minimum 65 percent money in stocks to be considered equity funds for the purpose of taxation. As of now, the regulations demands the underlying scheme needs to invest at least 90 percent of the money in units of ETF
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Revising definition of equity FoF
“It is proposed that the definition of ‘Equity Oriented Funds’ (EOF) be revised to include investment in Fund of Funds (FOF) schemes which invests a minimum of 90% of the corpus in units of Equity Oriented Mutual Fund Schemes, which in turn invest minimum 65% in equity shares of domestic companies listed on a recognised stock exchanges,” says AMFI. Put simply, the trade body wants schemes investing in mutual fund schemes with a minimum 65 percent money in stocks to be considered equity funds for the purpose of taxation. As of now, the regulations demands the underlying scheme needs to invest at least 90 percent of the money in units of ETF
Non-residents For non-resident Indian (NRI) investors, it has asked for a flat rate of TDS at 10 percent on dividend and redemption instead of the current slab-wise arrangement. “The rate of tax or TDS for NRIs on short term capital gains from Debt Schemes (Other than equity oriented schemes) be reduced from 30 percent to 15 percent at par with tax or TDS rate for Equity Schemes,” AMFI wrote to the government. The association also asked for allowing indexation benefits to NRIs investing in debt funds
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Non-residents
For non-resident Indian (NRI) investors, it has asked for a flat rate of TDS at 10 percent on dividend and redemption instead of the current slab-wise arrangement. “The rate of tax or TDS for NRIs on short term capital gains from Debt Schemes (Other than equity oriented schemes) be reduced from 30 percent to 15 percent at par with tax or TDS rate for Equity Schemes,” AMFI wrote to the government. The association also asked for allowing indexation benefits to NRIs investing in debt funds
Seeking capital gain bonds’ status to infrastructure funds It asked the government to declare mutual fund units investing in infrastructure assets as specified long term assets and such units to be considered for inclusion under section 54EC of the Income Tax Act. As of now, only a select clutch of institutions’ bonds are included under this section, which helps individuals seeking LTCG tax exemption on sale of property
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Seeking capital gain bonds’ status to infrastructure funds
It asked the government to declare mutual fund units investing in infrastructure assets as specified long term assets and such units to be considered for inclusion under section 54EC of the Income Tax Act. As of now, only a select clutch of institutions’ bonds are included under this section, which helps individuals seeking LTCG tax exemption on sale of property
Better tax treatment for exchange-traded funds AMFI also batted for better tax treatment of exchange-traded funds. The holding period of units in debt ETFs should be brought down to one year, instead of the current three years, to qualify for long-term capital gains, which should be taxed at the rate of 10 percent instead of 20 percent, it said. Similarly, gains on units of gold and silver ETF should be considered long-term if they are held for one year instead of three years
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Better tax treatment for exchange-traded funds
AMFI also batted for better tax treatment of exchange-traded funds. The holding period of units in debt ETFs should be brought down to one year, instead of the current three years, to qualify for long-term capital gains, which should be taxed at the rate of 10 percent instead of 20 percent, it said. Similarly, gains on units of gold and silver ETF should be considered long-term if they are held for one year instead of three years
Nikhil Walavalkar