What are budget expectations of Mutual Funds?
Mutual funds have been disappointed over the last two years as there has been little respite in the Budget. This time around, mutual funds will look at parity on a number of areas plus a reversal of some of the recent measures pertaining to capital gains tax and the tax on distribution of dividends by MFs.
Time to bring in DLSS
While ELSS has become extremely popular as a tax saving instrument, one argument has been that it forces people to take on risk. The answer could be in extending these Section 80C benefits to debt funds too and introduce a separate DLSS classification for the same. Of course, the lock-in period can be either retained at 3 years or extended to 5 years. The idea is that conservative investors need not be penalized when their financial plan dictates caution.
Parity with ULIPs and NPS
This has been a persistent demand of AMFI over the last few years. The first demand is to put pension plans of mutual funds at par with the National Pension Scheme (NPS) in terms of tax benefits. That will entail extending the additional exemption of Rs.50,000 on NPS to pension plans too. Secondly, while equity MFs are subject to LTCG tax, the ULIPs are exempt from any form of capital gains tax. This puts the mutual funds at a disadvantage and AMFI has been demanding parity.
While SEBI worked on fund categories, there is a fundamental issue of how to categorize funds. For example, the 65% equity exposure requirement to be classified as equity funds forces funds to take additional risk. This can be avoided by reverting to the old system of 51% exposure. Secondly, gold ETFs still get classified as non-equity and hence entail 3-year holding to quality as LTCG. Shifting to 1 year can encourage more flows into gold funds and gold ETFs.
Time to scrap LTCG tax
The LTCG tax on equity funds was introduced in 2018 at 10% without any indexation. This needs to be scrapped in this budget. It contributes little to tax revenues, distorts long term financial plans and leads to cascading effect of taxation. Since STT continues on the sale of equity funds, there is no reason to persist with the flat LTCG tax.
Do away with DDT
It is not clear if the budget will let go DDT on dividends as it contributes close to $10 billion each year. But what it can do is to scrap the DDT for equity funds and revert to the pre-2018 scenario. Even in the case of non-equity funds, the rate of DDT at 29.12% is too steep and virtually discourages dividend plans or forces them into SWPs. It is time for a serious rethink on DDT on MFs!