3 min read.Updated: 21 Jan 2022, 01:24 AM ISTN.S. Venkatesh
Conversion of savings into capital-market investments can boost the funding of our economic growth
As on 31 December, India’s mutual fund (MF) industry had ₹37.72 trillion in assets under management (AUM), representing more than a six-fold growth over its AUM of ₹6.11 trillion 10 years ago. There has been a spectacular rise in channelizing savings into investments. But the potential for a further rise is enormous, as is evident from Reserve Bank of India data that shows time deposits with banks were at ₹132.51 trillion as of 31 March, which is over four times the MF industry’s AUM.
The Association of Mutual Funds in India (AMFI) believes that proposals in the 2022-23 Union Budget can play a significant role in tapping this potential.
Debt-linked saving schemes: India’s corporate bond market is small and shallow, which forces companies to depend on bank finance for long-gestation projects. This is unhealthy and also crowds out small enterprises. One way to resolve this is to introduce debt- linked saving schemes (DLSSs) on the lines of equity-linked saving schemes to channelize long-term savings of retail investors into higher credit-rated debt instruments. Investments in it up to ₹150,000 may be given benefits available to tax-saving bank fixed deposits.
This will allow retail investors to participate in bond markets at low costs. Also, if large borrowers are persuaded to raise funds from the bond market, it will increase bond issuance over time and attract more investors, which will deepen the secondary market.
Mutual-fund linked retirement schemes: Presently, there are three broad avenues for post-retirement pension: the National Pension System (NPS), insurance-linked pension plans offered by insurance companies, and retirement/pension schemes offered by MFs. Under Section 80CCD of the Income Tax Act, investment in the NPS, the return and capital withdrawal all receive exemption, giving them an exempt-exempt-exempt (E-E-E) status. But investments in retirement/pension schemes of MFs fall under Section 80C, by which withdrawals are taxed. This is an anomaly, as similar investment products should receive the same tax treatment. This can be resolved by allowing all registered MFs to launch mutual- fund-linked retirement schemes (MFLRSs), with similar tax benefits as the NPS under Sections 80CCD (1) and 80CCD (1B). Like in the NPS, employers should be allowed to contribute to their employees’ corpus in MFLRSs and write off these contributions as business expenses. Such contributions up to 10% of salary should be tax deductible in the hands of employees.
MFLRSs can go a long way in democratizing pension benefits and bringing them to millions in the unorganized sector, while also playing a catalytic role in channelling household savings into the securities market. By assuring depth, it would also help curb market volatility and reduce reliance on foreign portfolio investment (FPI).
Channel long-term capital gains from property into infrastructure: In 1996, Sections 54EA and 54EB were introduced, allowing capital gains tax exemption for investments in specified assets, including mutual fund units, to encourage investment in the economy’s priority sectors. But in 2000-01, these sections were replaced by Section 54EC, whereby tax exemption on long-term capital gains (LTCG) was allowed only if money was invested in certain long-term assets redeemable after three years. This effectively stopped long-term gains on the sale of property from flowing into capital markets.
This is contrary to the nation’s needs. The government’s own numbers had pegged infrastructure needs at $1.4 trillion over 2019 to 2023. One way to raise such enormous funds could be if Section 54EC allows LTCG from the sale of property to be invested in MFs wherein the underlying investments are made in infrastructure. Such investments could have a lock-in of three years to be eligible for tax exemption and the schemes could be equity- or debt-oriented.
AMFI is also hopeful that the finance minister will consider other demands related to uniformity in tax treatment of investments in different financial sectors and mitigating hardships faced by retail and non-resident Indian taxpayers, among others. In line with global practices, the government should also let insurers outsource fund management activities to registered asset management firms. By reducing duplication of fund management expenses, this will result in large cost savings for insurance-plan buyers. It will also result in insurance firms and the MF industry working together—instead of competing—to channel the nation’s savings into investments.
N.S. Venkatesh is chief executive, Association of Mutual Funds in India.