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What are the key expectations for mutual funds from the budget

05 Jan 2023

Between 2014 and 2019, the assets under management (AUM) of mutual funds in India expanded from Rs.8 trillion to Rs.27 trillion. The mutual fund SIP monthly collections alone have grown to stabilize at around Rs.8,400 crore per month and have shown consistent growth in the last 3 years. That is a clear indication of retail interest in these products. Here is what the investors are expecting from the budget for mutual funds. Hike in Section 80C limit and carved limit for ELSS This has been a demand of mutual funds for quite some time now. The Section 80C limit has remained static at Rs.1.50 lakhs for some time now and that has constrained the growth of ELSS schemes. One option is to increase the overall limit from Rs.1.50 lakhs to Rs.3.00 lakhs, which would be more of a time bound rectification of these limits. Alternatively, the budget can also look to carve out a sub-limit for ELSS funs considering their importance in the overall scheme of financial planning.  Include debt funds in tax saving schemes Today ELSS only consists of equity funds by definition. One way would be to also include  debt funds under the current definition. The equity focus of ELSS largely leaves out the conservative investors and they lose out on the opportunity for saving tax and creating wealth over the long run. The government can look to extend these benefits to debt funds too. As a starting point, this benefit can be first extended to balanced funds with a minimum 51% exposure to equity; instead of the current 65%. Infrastructure funds and capital gains options In the past, there have been two products that were quite interesting for mutual fund investors. The Infrastructure fund special benefits were available on mutual funds subject to a lock in. This is a good time to revive the idea. Additionally, the budget can also look to bring back the capital gains saving option wherein capital gains reinvested in specified funds would be exempt from capital gains tax subject to a minimum lock in period. Encouragement for gold funds and ETF funds Currently gold funds have been increasingly in vogue due to rising prices of gold and a rise in consequent demand. However, gold funds tend to get taxed like debt funds. Since both debt and gold funds are part of financial planning, the budget can look to reduce the capital gains holding period to 2 years from 3 years in both the cases. In addition, ETFs (especially index ETFs) have picked up steam in the last few months. The ELSS status can be extended to all Index ETF subject to the lock-in, to make them more attractive. The tax break can be optional, instead of mandatory as in the case of ELSS funds. Rationalize DDT on equity and debt funds The DDT rates on equity and debt funds are highly discouraging. The DDT on dividends paid out by equity funds is charged at 11.648% including cess and surcharge. This needs to be scrapped right away to avoid the risk of double taxation. In addition, the tax on debt funds at 29.12% is just too steep and that needs to be reduced to avoid investors opting for SWPs just to avoid the dividend tax. Rationalize LTCG on equity funds This is something that needs to be done on a priority basis. The LTCG on equity funds was imposed at 10% above Rs.1 lakh per annum and that was on a flat basis. This was a major hindrance for long term planning since equity funds are a key instrument for resolving the issue of long term wealth creation. The LTCG on equity funds was forcing a lot of long term planners to withdraw the funds in a piecemeal fashion to reduce the tax liability and that was defeating the very purpose of long term planning. Long term capital gains tax has been a very small contributor and it would be best to scrap this tax on LTCG. That is a key expectation of mutual funds. Taxation of Fund of Funds and Solution Funds This has been an anomaly for some time. All funds of funds (FOFs) are treated as non-equity funds even if it is equity FOF. This was patently unfair to the investors in FOFs. More so because many investors were relying on solution oriented funds to meet specific needs like retirement, child education etc. This was making it tax inefficient and luring investors away from solution funds. Here again, the budget can look to make the taxation of equity FOFs and solution funds more equitable.

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