Bring level playing field between ULIPs and Mutual Funds

By Ravi Samalad |  28-06-19 | 
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Ravi Samalad is Assistant Manager - Editoral for

Finance Minister Nirmala Sitharaman will present her first Budget for the new government on July 5. Here are some of the key expectations from Association of Mutual Funds in India (AMFI) from the Budget.

Debt Linked Savings Scheme

Introduce Debt Linked Savings Scheme (DLSS) on the lines of Equity Linked Savings Scheme (ELSS) to channelize long-term savings of retail investors into corporate bond market, which would help deepen the Indian bond market. Investments up to Rs 1,50,000 under DLSS should be eligible for tax benefit under Chapter VI A, under a separate sub-section and subject to a lock in period of five years (just like tax saving bank fixed deposits).

Uniform tax treatment on switching investments under mutual fund schemes and Unit Linked Insurance Plans

In case of intra-scheme switches (i.e., switching of investment within the same scheme of a mutual fund) is not regarded as a transfer under Section 47 of the IT Act, 1961 and be exempt from payment of capital gains tax.

Uniform tax treatment on capital gains for mutual funds and ULIPs

Exclude the mutual units of equity-oriented mutual fund schemes from the ambit of LTCG tax and maintain status-quo ante, in so far as long term capital gains from equity mutual fund schemes are concerned, keeping the interest of the retail investors and to ensure level playing field between equity mutual fund schemes and ULIPs.

Removal of tax arbitrage between ULIPs and equity schemes on Securities Transactions Tax (STT) and Dividend Distribution Tax (DDT)

Mutual fund investors are required to pay STT on every purchase or sale of securities. In addition, investors are also required to pay STT on the redemption value at the time of redemption. Thus, there is a double levy of STT for equity mutual fund investors. Exchange Traded Fund (ETF) investors have to pay STT on the purchase as well as sale of units in the ETF. On the other hand, there is no STT levied on the withdrawal proceeds from ULIPs. To bring ULIPs and equity mutual funds on a level playing field, AMFI has requested to abolish the STT levied at the time of redemption for mutual funds.

Bonus paid in ULIPs, which is akin to payment of dividend in mutual funds, is not subject to DDT or any levy (nor subject to any capital gains tax). Currently, there is a double taxation for mutual fund investors. Mutual funds receive the dividends from the companies, net of DDT, and again when the mutual funds pay dividend after deducing DDT.  Thus, AMFI has requested to re-consider the matter and abolish the DDT on dividend paid under equity-oriented mutual fund schemes.

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

As in the case of NPS, investment in Retirement Benefit/Pension schemes offered by mutual funds up to Rs 1,50,000 should also be allowed tax deduction under Sec 80CCD (1) of Income Tax Act, 1961 (instead of Sec. 80C), within the overall ceiling of Rs 1.50 lakhs under Sec 80 CCE, with E-E-E status.  Likewise, the additional deduction for investment up to Rs 50,000 under section 80CCD (1B) (presently available to NPS subscribers should be extended to investment in Mutual Fund Retirement Benefit / Pension Schemes, over and above the deduction of Rs 1.50 lakh under section 80C of Income Tax Act,1961. Where matching contributions are made by an employer, the total of employer’s and employee’s contributions should be taken into account for the purpose of calculating tax benefits under Section 80 CCD.

Rationalization of tax treatment of infrastructure debt funds (IDF) and IDFs of NBFCs

The income from NBFC-IDF is in the form of interest, whereas the income from MF-IDF is in the form of dividend. The interest paid by NBFC-IDF attracts TDS at 10% for resident investors, whereas the dividend distributed by MF-IDF is subject to DDT under section 115R of the IT Act at 25% for individuals and HUFs and 30% for others (plus applicable surcharge). The levy of DDT adversely impacts the net returns from MF-IDF, due to the disparity in the tax treatment of income earned from IDFs of NBFCs vis-à-vis IDFs of MFs. It is recommended that tax-exempt institutional investors in MF-IDFs be exempt from DDT under section 115R of the Income Tax Act.

Read the full budget expectations here.

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