The investment fund industry is demanding a 10% capital gains tax on debt investment fund units held for more than 3 years, without indexation, as applicable to the Long Term Capital Gains (LTCG) tax on bonds.

The demand has been raised by industry body Association of Mutual Funds in India (Amfi), which in its proposal to the finance ministry said it made “sense” to do so as it could boost retail investor participation in bond markets. “We request an amendment to the Finance Act, 2023 and consider the mutual fund units as securities, with long-term capital gains tax rate which should be at par/in line with capital gains tax on bonds, debentures, SDL and G-secs etc,” Amfi’s budget proposal document said.Among other proposals, tax parity for fund-of-funds (FoFs) with their other equity-oriented peers is a demand from the mutual fund industry as Finance Minister Nirmala Sitharaman is set to present her full budget of the Modi 3.0 government on Tuesday, July 23. There is a demand to revise the tax on equities for equity-oriented FoFs as the industry finds the current regime challenging.In FOFs, investors buy shares in funds rather than investing in a pool of securities such as stocks and bonds.

For FOFs, a particular fund will be considered an equity-oriented fund (EOF) only if at least 90% of the total income of that fund is invested in the units of another fund which in turn invests at least 90% of its total income in the shares of domestic companies listed on a recognised stock exchange.

For other categories of investment funds, EDF status is awarded if 65% of the proceeds go to securities listed on domestic stock exchanges.

“Currently, equity-focused FoFs do not enjoy the same tax treatment as direct equity funds,” said Adhil Shetty, CEO, Bankbazaar.com, hinting at a profound impact on them if the Budget brings in tax changes. According to him, favourable tax treatment could attract more retail investors to equity-focused FoFs, resulting in higher inflows.

“Investors seeking diversification would benefit from equity-like tax treatment, making these funds a more attractive option. FoFs could become more viable for tax-conscious investors, making investment decisions easier as investors would no longer have to differentiate between direct equity funds and equity-focused FoFs based on tax implications alone,” he opined.

Abhishek Dev, co-founder and CEO, Epsilon Money Mart, said that treating equity-focused FOFs in line with other equity-focused funds will bring structural consistency. “Since the idea is to reward equity participation in economic growth, equity-focused FOFs play the same role. Many of these FOFs have been created to support solution-orientedness through judicious packaging of primarily domestic equity sub-asset classes,” Dev said.

Taxation for EOFs

If FoF is classified as an equity fund, the Short Term Capital Gains (STCG) tax is 15% for investments sold within one year of investment, while the Long Term Capital Gains (LTCG) tax is 10% for income above Rs 1,00,000 sold after one year of investment.

If a FoF is classified as a debt fund and if units are redeemed within three years of purchase, the Short Term Capital Gains (STCG) tax will be applicable. The gains will be added to the individual’s income and taxed as per the individual’s tax bracket. On the other hand, a 20% LTCG tax with indexation will be applicable on investments sold after three years.

Another government requirement is to allow all asset managers to launch pension-oriented MF schemes with a uniform tax treatment like the NPS (National Pension System).

Shetty said that by offering a uniform tax treatment, the objective of greater financial inclusion could be achieved. The move would enable greater accessibility for people to plan for their retirement, he said, adding that it would also lead to greater competition in the industry, improve products and increase inflows into mutual funds.

Epsilon Money Mart’s Dev acknowledged NPS as a great product, but also said there could be a good case for dedicated retirement funds in the form of mutual funds – both for accumulation and retirement income, given their reach and proven success with market-linked strategies.

However, he argued for specific guidelines that may be needed for such products, given the long-term nature of investments and the sensitivity around the importance of maintaining consistent income over long periods, across market cycles.

Nuvama sees negative implications of the existing tax regime in both cases. It is less hopeful about the issues included in this year’s budget.

Also read: Budget 2024: Jewelery Industry Pushes for 5% Cut in Gold Import Duties. What It Means

(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of Economic Times)