The Association of Mutual Funds in India in its Budget Proposals for FY2021-22 has reinforced its long pending demand to bring parity in tax treatment for investments in different financial sectors. AMFI has reiterated its long-standing demand to bring parity in tax treatment of Mutual Funds and ULIPs, both of which are investment products and invest in securities. Currently, ULIPs enjoy more tax benefits as compared to Mutual Funds in various aspects like no capital gains on switching, no STT levied on the redemption proceeds from ULIPs, no income tax on the proceeds from ULIPs of Insurance companies (including early surrender / partial withdrawals) subject to certain conditions.
To deepen the bond market, AMFI has once again reinforced its suggestion of introducing Debt Linked Savings Scheme on the lines of Equity Linked Savings Scheme to channelise long-term savings of retail investors into higher credit rated debt instruments with appropriate tax benefits. At least 80% of the funds collected under DLSS shall be invested in debentures and bonds of companies as permitted under SEBI Mutual Fund Regulations.
To mitigate hardships to retail taxpayers, AMFI requested that the threshold limit for withholding tax (TDS) on income distribution (dividend) on mutual fund units be increased from ₹5,000 to ₹50,000 p.a. and a cap of 15% on surcharge rate on income distribution on Units from equity mutual funds schemes in the hands of non-corporate taxpayers.
Yet another issue is about the minimum holding period now for units of debt-oriented mutual funds (listed or unlisted) to qualify as long-term capital asset is more than 36 months. Bringing in uniformity in the holding period for LTCG for direct investment in listed debt securities/and zero-coupon bonds (listed or unlisted) and for investment through debt mutual funds. However, for direct investments in listed securities such as bonds/debentures, Government Securities and derivatives listed on a recognised stock exchange in India and zero-coupon bonds (listed or unlisted) the holding period to qualify as long-term capital asset is just 12 months.
AMFI, making a case for CPSE investment of surplus funds in Mutual Funds, in its pre-budget proposals to Finance Ministry, has asked to revise the current Department of Public Enterprises (DPE) guidelines, and permit the Maharatna, Navratna and Miniratna CPSEs to invest their surplus fund in any SEBI registered Mutual Fund, irrespective of whether it is a public sector mutual fund or a private sector mutual fund; and enhance the current limit of 30% of available surplus funds for investments in mutual funds by CPSEs to 50% of available surplus funds.
AMFI has also submitted that let there not be any stipulation on any minimum corpus size in respect of the debt scheme as a pre-condition for investments by CPSEs and also rating of only one SEBI-registered Credit Rating Agency be accepted as adequate, instead of existing requirement of any two separate Credit Rating Agencies.
For REIT, market participants want, the government should reduce the timelines of investment from three years to one year for LTCG to attract larger retail investor participation and easing a long-term funding challenge for such projects.
Allowing Insurers to outsource fund management to Mutual Funds would go a long way in enabling each of the asset class to deliver its core to the retail audience.
Some of the retail investor focussed long standing demands made by the industry, if accepted, will go a long way in making Mutual Funds a preferred investment option for long term, tax efficient wealth creation.