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'Wish uniform tax treatment of gains in mutual funds and ULIPs in Budget 2021'

Here is a detailed wishlist from Jimmy Patel, MD & CEO of Quantum AMC from the Budget 2021 in respect of mutual funds. (REUTERS)Premium
Here is a detailed wishlist from Jimmy Patel, MD & CEO of Quantum AMC from the Budget 2021 in respect of mutual funds. (REUTERS)

Jimmy Patel of Quantum AMC recommends to introduce Debt Linked Savings Scheme in Budget 2021. He also recommends to bring uniform tax treatment in respect of investments in mutual funds and ULIPs. He wishes exemption of long term capital gains in mutual funds under Sec. 54 EE

The upcoming Union Budget is likely to be presented on February 1, 2021. Jimmy Patel, MD & CEO of Quantum AMC recommends to introduce Debt Linked Savings Scheme, in line with ELSS mutual funds to deepen the Indian bond market. He also recommends to bring uniform tax treatment in respect of investments in mutual funds and ULIPs. Further, he wishes exemption of long term capital gains in mutual funds under Sec. 54 EE. Here is a detailed wishlist from the CEO from the Budget 2021 for mutual funds:

1) Introduce Debt Linked Savings Scheme (DLSS) to deepen the Indian Bond Market

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• Minimum of 80 % of funds under the category of Debt Linked Savings Scheme (DLSS) shall be invested in debentures and bonds of companies that are permissible under SEBI Regulations.

• DLSS should be introduced similar to Equity Linked Savings Scheme (ELSS) to generate potential returns for long term savings of retail investors into corporate bond marketswhich also helps boost the Indian Bond Markets.

• Pending investment of funds may be invested in short term money market or liquid instruments or both.

• Investments upto 1,50,000 under DLSS be eligible for tax benefit and subject to a lock in period of 5 years i.e. similar to bank FDs.

• An active corporate bond market shows stronger market sentiments and consequently lower risks and lesser dependence on local currency.

• DLSS may mobilize small investors to participate in bond markets at low costs and at a lower risk as compared to Equity markets.

• We believe that debt oriented mutual funds are on par with tax saving bank fixed deposits, where deduction is available under Section 80C.

2) Uniform tax treatment in respect of investments in Mutual Funds Units and ULIPs of Life Insurance companies

• Standardizing tax treatments for switching Investments under Mutual Fund schemes and ULIPs of Insurance companies.

• Exemption of payment under capital gains tax since it is termed as intra scheme switches and not ‘Transfer’.

• Switching of Units within the same scheme of a Mutual Fund.There are no realized gains, as the underlying securities/ portfolio remains unchanged, being common for both Options.

• SEBI has emphazised the need of uniform tax treatment for ‘switch transactions from insurance products to mutual fund investment schemes to have a common platform to benefit all investors.

• Uniform tax treatment on Capital Gains from Mutual Funds investments and ULIPs of Insurance companies.

• Prioritizing the interest of retail investors is most important. We must also ensure there is a common bridge between mutual fund schemes and ULIPs.

• Retail investors may get confused between a pure investment product like MFs and insurance products with equity exposure.It is essential to relook at high commissions and incentive structure prevailing in life insurance sector.

• Removal of Tax Arbitrage between ULIPs & Equity MF Schemes on account of STT.

3) Uniform Tax Treatment for Retirement / Pension Schemes of Mutual Funds and NPS

• Under Section 80CCD tax deduction for Investment in Retirement Benefit / Pension Schemes offered by Mutual Funds upto 150,000 should be allowed within the maximum limit of 1.5 lakh with additional deduction for investment up to 50,000 under section 80CCD. Also the net total of employer’s and employee contribution should be taken into account for the benefit of tax calculation under section 80CCD.

• Eligibility of an employer should be allowed as an eligible ‘Business Expense’ under Section 36(1)of Income Tax Act,1961. Also contributions made by them to Pension Schemes up to 10% of salary should be deductible in the hands of employee, as in respect of Section 80CCD(2). In addition, withdrawals made by employees for the same should be exempted from income tax as limits explained in the sections.

• Also recommended that CBDT, in consultation with SEBI, should NOTIFY the guidelines giving the framework for Mutual Funds to launch pension schemes for tax eligibility and norms adhering to it.

• With a large ageing population, increased longevity and consequently growing health care needs and medical expenditure, there is a strong need for individuals to set aside funds for a long term pension product that could provide decent inflation-proof savings. Considering that India's population is around 1.34 billion is around 10 percent, therefore pension funds in India have, a large potential as a social security measure and needs to be given dueimportance.

• Forecasting scope for growth in India’s retirement benefits market as the existing investors are low but has potential togrow in the future especially in the unorganized sector.

• Globally, market-linked retirement planning has been a boon for high-quality retirement savings. Investors willhave many choices in scheme selection and flexibility.

• Long Term Policy for Mutual Funds under SEBI classification Mutual Fund Linked Retirement Plan’ (MFLRP) which would be eligible for tax benefits akin to 401(k) Plan of the U.S

• MFLRP may play a significant role in channelizing household savings into the securities market and penetrating deeply in the financial markets. That would also help in mitigating risk and reducing volatility in the capital markets

• MFLRP would help investors gain investment expertise from a large talent pool of asset managers of mutual funds efficiently with the support of research teams.

• MFLRP could target individuals who are from the unorganized sector and also have the flexibility to save for the long term, coupled with tax benefits.

4) Mutual Fund Units should be notified as ‘Specified Long-Term Assets’ qualifying for exemption on Long-Term Capital Gains under Sec. 54 EC

• MF units that are redeemable after three years, wherein the underlying investments are in equity or debt of ‘infrastructure sub-sector’ as specified by RBI, should also be included in the list of the specified long-term assets under Sec. 54EC.

• The investment shall have a lock-in period of three years to be eligible for exemption under Sec. 54EC as well as providing the option equity, or debt schemes based on each individual’s goals.

• Long term capital gains could be saved by the investor as it could be reinvested in other MF schemes alongthe same lines for sale of transactions of immovable property.

• With the growing demand of increased expenditures in housing, buying property,investment in infrastructure has been a boon to the real estate market. It is likely that most individuals liquidate their financial assets to purchase residential property resulting no reinvestment in capital market. Therefore this transaction of moving money has become irreversible. Thus it is important to channelize long term savings into capital markets with the help of tax incentives given by the government through MF schemes.

• A lock in period of three years is a necessity for both equity and debt schemes in order to reverse the one way street for investors from real estate to capital markets.

5) Mutual Fund Units should be notified as Long-Term Specified Assets qualifying for exemption on Long-Term Capital Gains under Sec. 54 EE

• Recommendation for a lock-in for three years may be notified as “Long term specified assets" under Section 54EE for MF units issued under SEBI rules and regulations.

• Announcing the MF investment units as Long term specified assets under Section 54EE would encourage individual tax payers to invest in capital markets through MF’s and channelizing long term household savings into Capital Market.

• Suggest exemption from capital gains tax for net consideration in investment for certain specified assets including MF units i.e. is withdrawn after 3 years, shall be made provisions for. They also serve as a great boost for investors wanting to invest in MF schemes debt or equity.

6) Taxation on Listed Debt Securities and Debt Mutual Funds to be aligned

• There needs to be an aligned holding period for long term capital gains between investment in listed debt securities and debt mutual fund schemes.

• Investing in non-equity oriented schemes where 65% or more is invested in long term debt securities could bring the common platform and pave theway for direct investment as mentioned in the above point.

• Parity between direct investment in listed debt instruments and investment in debt-oriented mutual fund schemes is the need of the hour.

7) Definition of Equity Oriented Funds (EOF) to be revised to include Equity Oriented “Fund of Funds"

• “Equity Oriented Funds" (EOF) which invest predominantly, say 65% or more, in units of Equity Oriented Mutual Fund Schemes should be exempted from ‘tax on distributed income’ under section 115R. Also redemption of units in such schemes should be allowed same capital gains tax that is applicable to sale of listed equity securities / units of Equity Oriented Mutual Fund Schemes

• Need to revamp this strong case for rationalization of taxation between Equity and Equity Oriented Fund of Funds. Reconsidering, FOFs investing 65% or more of their corpus in EOF should be reclassified as EOF’s.

• To recognize and ensure that the intent of the law is not sacrificed, the minimum allocation of an FOF investing in the major asset class may be set at a higher level, say 90% for such eligibility. In the absence of such higher allocation, a FoF investing more than 65% in funds that invest at least 65% in equities may attract equity taxation while theoretically investing merely 42.25% in equities.

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