LTCG relief for equity investments in MFS
Industry seeks parity in tax treatment of mutual funds and ULIPS
The mutual fund (MF) industry has sought tax exemptions for longterm equity investors in the Budget for the fiscal year 202324 to “encourage long-term investment”.
“It is requested that listed equity shares or units of equityoriented fund schemes be exempted from capital gains tax (LTCG) if equity shares or mutual funds units are held for at least three years,” the industry stated in its wish list for the 2023-24 Budget.
Justifying the proposal, the Association of Mutual Funds in India (Amfi) said the 10 per cent LTCG tax on equity schemes is at times higher than the effective tax on debt investments post-indexation benefits.
At present, gains from equity investments (held for more than one year) are taxed at a flat rate of 10 per cent, if the profit exceeds ~100,000 in a financial year. In the case of debt funds, gains are taxed at the investor’s slab rate but those staying invested for more than three years get indexation benefits (the value of the investment is adjusted for inflation to rather than buying physical bring down the tax). gold”. They have proposed “(The proposal) if RUN-UP LTCG tax of 10
TO THE considered will per cent on profits, encourage long-term instead of 20 per cent, investments in with indexation benefits equities and will help and also sought channel more household reduction in holding savings into the period for LTCG to 1 equity markets, thus year from 3 years. helping the Indian “(The proposal) is economy,” Amfi said in line with the government’s in a note. agenda to discourage
Fund houses also sought savings and investments in preferential tax treatment for physical gold/jewellery, and gold exchange-traded funds boost the financialisation of (ETFS) to “encourage retail gold holdings,” Amfi said. investors to invest in gold At present, the tax rate is through mutual fund route, the same for every gold
investment avenue.
The industry has also called for parity in the taxation of equity funds and fund of funds (Fofs) investing in such schemes. Currently, schemes that invest at least 65 per cent in equities are taxed as equity-oriented schemes. But many a time Fofs investing in such schemes come under the ambit of non-equity taxation. This is because only those Fofs qualify for equity taxation which have investments in equity funds having over 90 per cent allocation to equities.
“The tax treatment should be the same in both cases as the underlying portfolio of investments includes domestic equities only. This will ensure that the intent of the law is not sacrificed,” Amfi said.
Beyond these, the industry has sought exemption for itself from the newly added Section 194R in the Income Tax Act. Explaining its demand, Amfi said that if an investee company defaults, the law would require the fund house to pay TDS on behalf of the investee company, leading to more losses for investors. The industry has also called for amendments to Section 43B to align the time limit for filing of tax audit reports and filing of returns.
Apart from these proposals, most other requests made by Amfi are the same as last year. For example, it has reiterated its long-standing request to bring parity in the tax treatment of mutual funds and unit-linked insurance plans (Ulips).
“There is still a clear case of tax arbitrage, whereby Ulips are not only placed at an advantageous position vis-à-vis mutual fund schemes, but there is also a significant revenue leakage on capital gains from Ulips, especially from the HNI segment,” Amfi stated in its wish list for the Budget 2023-24.
The other long-pending demand that re-appeared this year is uniformity in taxation on listed debt securities and debt mutual funds. The holding period for long-term taxation is 12 months for listed debt papers and 36 months for debt funds. The industry has requested the minimum holding period to be brought down to 12 months for debt funds also.