To boost the demand for Shariah compliant mutual funds in the country, government should provide income tax relief on investment in such products along the lines of equity linked savings schemes (ELSS), experts have said.

Shariah laws prohibit one from investing in companies dealing with businesses like alcohol and tobacco, among others. They also do not allow interest payments.
SBI Mutual Fund is launching an Shariah-compliant diversified equity fund on December 1, aimed at attracting investments from the country’s large Muslim population. The scheme closes on December 15 and the fund is likely to reopen on or before December 26.

The leading asset management firm will become the fourth fund house in India to have an Islamic equity fund after Goldman Sachs MF, Taurus MF and Tata MF.

“There is no tax incentive on investment by the government for any of the Shariah compliant equity funds. Had there been separate tax incentive for such schemes, they must have attracted more and more people,” Economic Initiatives founder and consultant for participatory finance serving Basix social enterprise group, Syed Zahid Ahmad said.

Industry officials say that tax incentives will give a much-needed boost to such products.

Tata Mutual Fund’s Senior Fund Manager Pradeep Gokhale said the Tata Ethical fund offers investors (irrespective of their religious preferences) an avenue to own high quality growth stocks that perform consistently across market cycles.

“Unlike tax saving mutual funds and equity linked saving schemes (ELSS), there is no tax incentive on investment in these funds. It is despite the fact that only capital gain and dividends are tax free in these funds,” Gokhale said.

There is a big niche investor base who is not investing their money anywhere else and we want to bring such money into the capital market through this scheme, SBI MF Chief Marketing Officer D P Singh said.

As applicable to other equity schemes, all returns in this type of fund, if kept for more than 12 months will be treated as long term capital gains, which is taxed as nil.
Shariah compliant equity index or BSE Sharia Index has outperformed the BSE Sensex by 7-8 per cent in the last year, he added.

The BSE launched a specialised index, the S&P BSE 500 Shariah last year, which has given an annual return of 44.55 per cent as against the annual return given by S&P BSE Index at 39.70 per cent as on November 28, the BSE site said.

“The investible universe typically consists of companies that have high return ratios, strong cash generation to support the growth of their businesses and very low leverage. Such stocks give consistent and superior returns over a complete market cycle with low volatility,” Gokhale said.