The mutual fund industry have been asking to equal treatment between equity mutual funds and Unit Linked Insurance Plans or ULIPs for a very long time. FM Nirmala Sitharaman will present the budget for the fiscal year 2023-24 which will be her fifth budget as the finance minister. As Budget for fiscal year 2023-24 is around the corner here are some of demands put forth by the mutual funds.
Treat mutual funds at par with ULIPs
Unit linked issuance plans (ULIPs) are fully exempt on maturity or on redemption. However, capital gains made in mutual funds is taxed on equity funds as well as debt funds.
AMFI has repeatedly underlined that ULIPs have some tax advantages over mutual funds, which needs to be addressed to bring tax parity.
“This has been a long standing demand of mutual funds since there is no structural difference between a mutual fund and ULIP and both are effectively investment products, although ULIP is sold as an insurance product,” quoted IIFL Securities in a report.
ELSS funds, an equity funds, wherein investors can save tax under Section 80C of the Income Tax Act. Currently, Equity Linked Savings Schemes (ELSS) are exempt under Section 80C of the Income Tax Act up to a limit of ₹1.50 lakh per year.
There are some changes that are now being demanded by the mutual funds on the ELSS front.
1) Currently, ELSS done in a minimum size of Rs500 and in multiples of Rs500. The ask has been that mutual funds ‘believe they are losing out on a lucrative market by insisting on this multiples of ₹500′ said the IIFL report.
It suggested that the base can be maintained and the multiple condition dropped.
2)ELSS facility is currently available to predominantly equity funds and not to debt funds. But there are investors who want to start off with debt investing and a DLSS may appeal to such investors. The DLSS can have a similar lock-in period of 3 years, said the report
3)Sebi permitted passive funds of ELSS also to be launched indexed to an index. The demand is that if a passive ELSS is launched, then the active ELSS has to be disbanded. “Since, these are 2 distinct categories, the budget can explicitly allow an AMC to have an ELSS active fund plus an ELSS passive fund,” the IIFL report said.
Tax exemption on capital gains on long term equity funds
Long term capital gains on equity and equity funds are currently taxed at a flat rate of 10% (without indexation) after considering a base exemption of Rs1 lakh. The investor to pay capital gains tax at flat rate of 10% even if the equity funds are held for more 15 years.
One expectation in the budget is that the government can charge tax on equity fund LTCG between 1 year and 3 years. However, if held for more than 3 years, then the LTCG can be made fully exempt.
Give tax breaks for reinvestment of capital gains in equity funds
Prior to to fiscal year 2000-01, there were Section 54EA and Section 54EB of the Income Tax Act. The capital gains on an asset was exempted from tax if the proceeds were reinvested in select mutual funds, subject to a lock in period, which could range from 3 years to 7 years.
Post 2000 provision was scrapped and that benefit of reinvestment of capital gains is only available for infrastructure bonds and not for mutual funds.
Another major expectation is to bring back the section where capital gains from any long term asset can be reinvested in mutual funds.
Expand equity funds definition for taxation purpose
Currently, equity funds are classified as LTCG with a 1 year holding and are taxed at a lower rate. All other funds are classified as non-equity funds, which have to be held for minimum 3 years to qualify as long term, with higher tax rates.
The budget expectation is that all risky funds like gold funds, index funds, index ETFs and REITs are treated at par with equity funds for tax purposes. This can boost their demand substantially.
Allow mutual funds to enter the retirement market
IIFL in its report said that Sebi registered mutual funds should be allowed to launch pension oriented retirement schemes with the same tax benefits as NPS.
Another demand by the mutual fund industry is that they be permitted to manage funds on behalf of insurance companies. It will insurance companies can outsource fund management for a fee and focus on product origination and sales.