The count down for the first-full budget of Modi-led NDA Government has begun. Industry is busy presenting its wish-list to the Government. It is widely anticipated that, the budget is going to have a big thrust on reforms. The big question is what's there for the aam aadmi in the budget who voted the Modi-led-NDA Government by a thumping majority.

Given that the Government has a herculean task of meeting fiscal deficit target, there is a little scope to be generous on tax incentives. However, there is a possibility of some announcements might come from the north block which may benefit not only the industry, but also the common man. The Indian mutual fund industry is waiting for one such announcement.

What does the mutual fund industry expect?

The Association of Mutual Funds in India (AMFI) in proposal to the Union Ministry of Finance has made a plea to broaden the list of 'specified long term assets' under Section 54EC of the Income Tax Act, 1961 to include mutual fund units, whether equity or debt. To simply put, AMFI is asking for inclusion of mutual funds in the exemption list under Section 54EC of the said Act.

If this proposal is accepted, one may claim a tax exemption on capital gains made on a capital asset by investing proceeds in units of mutual funds. It is proposed that, underlying investments, be it in debt or equity oriented funds, can be made in infrastructure sub-sector based on the risk appetite of the investor, with a lock-in period of 3 years.

What is the rationale?

AMFI has expressed a view that flight of money from financial markets into real estate sectors has become an irreversible phenomenon. Money moves out of financial assets when people want to buy immoveable properties, apart from borrowed funds from banks or other sources being accessed to. But this money never comes back to mutual funds, is what's argued by some representatives of the mutual fund industry.

Impact on property market and the mutual funds, if the proposal goes through…
As many of you know, currently tax exemption under Section 54EC of the Income Tax Act, 1961 is available only if the if the long-term gains from sale of immovable property are invested in specified long-term assets; which are tax saving bonds issued by Government entities, namely NABARD and NHAI, that are redeemable after three years. But now if the forthcoming budget includes mutual funds in the list of 'specified long term assets' for claiming an exemption on the gains earned through sale of immovable capital assets, individual assessees will have access to a better wealth creating investment avenue such as mutual funds and the entire Indian mutual fund industry may vastly benefit.

Nevertheless, for investors, the challenge would be in picking winning mutual funds gauging their risk appetite and risk tolerance. And to overcome this challenge, mutual fund houses would persistently need to educate investors rightly. Since investments may be done in sub-sectors of infrastructure theme, thematic risk can be higher and investors may not have appetite for such risk.

If the finance ministry pleases the Indian mutual fund industry by accepting the proposal, it may not go down so well with India's real estate sector which is feeling the shivers of cold response from buyers. So, it would be a tight rope for the finance minister.

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