AMFI Rolls Out Proposals to Make Mutual Funds More Investor Friendly
Jan 21, 2020

Author: Divya Grover

AMFI Rolls Out Proposals to Make Mutual Funds More Investor Friendly
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Association of Mutual Funds in India (AMFI) has floated proposals for the Union Budget FY2020-21. In its elaborate 17-point budget wish-list, AMFI has proposed measures which would take the Indian mutual fund industry to the next level of growth.

N S Venkatesh, Chief Executive, AMFI, while speaking to media said, "AMFI's suggestions have been in the Budget Proposal list for a few years. We are hoping this time our long pending submissions get addressed, which would help take the Indian mutual fund industry not only to the next level of growth, but also help in contributing to making economy stronger, especially with deepening of bond market, making long term availability of funds for infrastructure growth, and reducing the fiscal deficit by shifting investments from Pure Gold to Gold ETFs,".

Here are the key points proposed by AMFI which are aimed at making mutual funds more retail-investor friendly:

Introduction of DLSS

AMFI has proposed introduction of Debt Linked Saving Scheme (DLSS) on the lines of Equity Linked Saving Scheme. This would help channelise long-term savings of retail investors into corporate bond market and help in deepening the Indian Bond Market.

It has proposed that investment up to Rs 1.5 lakh under DLSS be eligible for tax benefit subject to a lock-in period of 5 years. According to AMFI, DLSS will help small investors participate in bond markets at low costs and at a lower risk as compared to equity markets. This will also bring debt-oriented mutual funds on par with tax saving bank fixed deposits, where deduction is available under Section 80C.

Uniform tax treatment

At present there is a difference in tax treatment with respect to investment in mutual fund units and ULIPs even though both invest in securities. AMFI has requested uniform tax treatment to ensure a level playing field between mutual funds and ULIPs in the following ways:

  • Intra-scheme switches (i.e. switching of investment within the same scheme of a mutual fund) should be exempt from payment of capital gains tax as no gains are realised

  • Units of equity-oriented mutual fund schemes to be excluded from the ambit of LTCG tax. The provision has placed mutual funds at a great disadvantage vis-a-vis ULIPs of Insurance companies.

  • Abolishment of Securities Transaction Tax (STT) levied at the time of redemption of mutual fund units by the investor. There is no STT levied on the withdrawal proceeds from ULIPs.

  • Abolishment of dividend distribution tax (DDT) on dividend paid under equity-oriented mutual fund schemes

Retirement/Pension schemes of mutual funds

AMFI has proposed that Indian Mutual Funds be able to launch Mutual Fund Linked Retirement Plans (MFLRP), which would be eligible for the same tax concessions available to National Pension System (NPS).

A majority of NPS subscribers are from the government and organized sector. Hence, MFLRP could target individuals who are not subscribers to NPS, especially those from the unorganized sector and provide them an option to save for the long term, coupled with tax benefits.

Taxation on debt securities and debt mutual funds

A direct investment in a listed debenture, if held for more than 12 months, is treated as long term investment, whereas, if the said investment was made through a debt-oriented Mutual Fund scheme, the period of holding is increased to 36 months for it to be regarded as long-term investment.

Thus, there is a need for harmonising the tax treatment on investments in debt-oriented mutual funds and direct investments in debt securities.

Lowering DDT on debt mutual fund schemes

AMFI has proposed that DDT on debt schemes should be lowered and at least brought at par with the corporate tax rate of 22%. Currently, the tax rate is 25% for individuals and 30% for corporates (excluding surcharge and cess). Higher DDT reduces the post-tax dividend available to investors making debt mutual fund schemes less attractive.

Elimination of double taxation of STT

As per current tax laws, in respect of Equity Oriented Funds, the mutual funds are required to pay STT on every purchase and sale of securities. In addition, the investors are also levied STT on the redemption value at the time of redemption of units. Therefore, there is a double levy of STT for an investor investing in the equities through equity mutual fund scheme.

AMFI has proposed to abolish the incidence of STT at the time of - (i) redemption of units by the investor in an equity-oriented mutual fund scheme; and (ii) sale of units in an equity-oriented ETF on a stock exchange.

Revision in threshold limit of equity oriented funds

It is proposed that the threshold limit of equities be reverted to 50% from the current 65% to be qualified as equity-oriented fund. This would ensure that asset allocation products with equitable risks are also promoted leading to penetration of debt markets and promotion of real balanced portfolios. It will encourage more number of investors with a lower risk appetite to invest in mutual funds.

AMFI has also proposed the following:

  • Mutual fund units should be notified as 'Specified Long-Term Assets' to qualify for exemption on long-term capital gains under Section 54 EC of the Income Tax Act

  • Definition of Equity Oriented Funds (EOF) to be revised to include equity oriented `Fund of Funds'

  • Reducing holding period of Gold ETF for long-term capital gain purpose from 3 years to 1 year

  • TDS for NRIs on short-term capital gain from redemption of debt schemes to be reduced from 30% to 15% at par with TDS rate for equity schemes

  • Uniformity in tax treatment of Infrastructure Debt Funds of Mutual Funds and Infrastructure Debt Funds of NBFCs

  • Exemption from DDT for tax-exempt institutional investors such as EPFO, NPS, Insurance Companies, non-profit Section 8 companies, etc.

  • Suitable clarifications should be issued with regard to the treatment of the units allotted consequent to segregation of portfolio of a mutual fund scheme in the hands of the unit holder for the capital gains tax purposes

  • Payments made by mutual funds which are not chargeable to tax under the provisions of Income Tax Act be included in the Specified List under Rule 37BB (3) (ii); and mutual funds/AMCs be permitted to submit the requisite information under section 195(6) of the Income Tax Act, 1961 in respect of payments made to non-resident investors which is chargeable under the provisions of the Income Tax Act on an annual basis along with the Annual Information Report

  • Pass- through status be accorded to Category III AIFs for income tax purposes

Domestic mutual fund investors turned cautious in 2019. Their net purchase tally for the year 2019 was Rs 54,946 crore, while for the year 2018 and 2017 was Rs 1,18,690 crore and Rs 1,18,775 crore, respectively.

The proposals by AMFI if implemented will bring mutual funds on par with comparable investment avenues and thereby boost inflows in equity and debt schemes.



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