MF industry bats for no retrospective taxation of debt funds

The mutual fund industry is hopeful that government will not retrospectively tax debt fund investors who redeemed their holding between April 1, 2014, and the Budget announcement imposing a 20 per cent tax on long-term capital gains on debt funds.

"The feelers we are getting from the government gives us hope that concerns of fixed maturity plan (FMP) investors (regarding retrospective taxation), who redeemed in the current financial year before the Budget would be addressed. The Association of Mutual Funds in India (Amfi) through the Securities Exchange Board of India (Sebi) is also raising the genuine grievances of such investors," Dinesh Khara, managing director and CEO, SBI Mutual Fund, told Money Today.

FMPs, are close-ended debt funds with mostly 13-14 months tenure. These funds are popular because they offer double indexation benefit, which significantly reduces the tax outgo on long-term capital gains.

The government has proposed to increase long-term capital gains on non-equity oriented funds from 10 per cent to 20 per cent without indexation, and raised the minimum investment period for being considered long-term capital gains from 12 months to 36 months.

While increasing long-term capital gains tax would not have such an adverse effect on investors as indexation benefits neutralise the impact, increasing the investment tenure from 12 months to 36 months would result in many investors with less than three-year tenure in debt funds being taxed at higher rates.

The new rules would be applicable from April 1, 2014, raising concerns of retrospective taxation on redemptions made after the date.

Khara does not see huge redemptions due to changes in taxation laws of non-equity oriented funds. He points out total assets in FMPs amount to Rs 1.25 lakh crore, 30 per cent of which is from retail investors. "We believe retail portion of the money would still come to FMPs, and some part of the money that corporates park in FMPs would come to liquid funds," he says.

Non-equity-oriented funds used to be taxed at 10 per cent without indexation and 20 per cent with indexation. After the Budget proposal, taxation without indexation will no longer exist. Indexation is adjusting the purchase price of each unit of the fund with inflation for tax calculation purpose.

On the Budget proposal to extend the tax benefits to mutual fund-linked pension funds, Khara expected this would result in annual inflows of close to Rs 18,000 crore annually.

"There are 3.6 crore tax payers, even if 10 per cent (36 lakh) of them invest Rs 50,000 annually in mutual fund pensions plans, Rs 18,000 crore could come every year in these funds," he says.

On the likely look of these funds, Khara said like each scheme has a growth and a dividend plan, pension plan would be one of the options. "The pension plan would by default have a longer lock-in," he added.