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Budget 2013: Mutual funds demand lower tax on debt funds
February, 05th 2013

The mutual fund industry wants more tax benefits for investors in the Union Budget this year.

The industry is demanding separate deduction for equity-linked savings schemes (ELSS) apart from the Rs 1 lakh Section 80C limit, reduction of tax on debt funds, broadening of the Rajiv Gandhi Equity Savings Scheme (RGESS) and tax incentives for retirement plans launched by mutual funds.

"In our view, there should be tax incentives for equity fund investments. This could be in form of creating a separate deduction for ELSS funds or broadening the RGESS to include diversified equity funds, and also making this available to all individual investors with income of less than Rs 10 lakh rather than only first-time equity investors," says Anthony Heredia, MD and CEO, Morgan Stanley Mutual Fund.

Tax benefit under the RGESS is available only to first-time equity investors who earn less than Rs 10 lakh. Under the scheme, 50% investment up to Rs 50,000 in approved stocks and mutual funds is eligible for deduction under Section 80CCG of the Income Tax Act 1961. This is over and above the Rs 1 lakh Section 80C limit.

"The RGESS should be extended to all equity investors and not just first-time investors. The Rs 10 lakh annual income cap should also be removed," says Debashsih Mallick, managing director and CEO, IDBI Mutual Fund. He says opening a demat account should not be mandatory. "This will broaden the market for the RGESS," he says.

"A simplification of rules, both with regards to who can invest, and lock-in periods, will create a better response that we are seeing at present," says Heredia of Morgan Stanley Mutual Fund.

"Retail investors are hoping for a simpler procedure for investing in the RGESS and tax benefit for each year the amount is invested rather than only in the first year," says Vineet Agarwal, director, KPMG.

The industry is also hoping that the Budget reduces the tax burden on debt funds. At present, both long- and short-term capital gains from debt funds are taxed, unlike in equity funds, where long-term capital gains are tax-free.

Investors receive dividend from debt funds after deduction of dividend distribution tax. Dividends from equity funds are tax-free.

"The dividend distribution tax on debt funds can be either reduced or completely removed," says Vijay Mantri, managing director and chief executive officer, Pramerica Mutual Fund.

Mallick of IDBI Mutual Fund says that like equity funds, long-term capital gains from debt funds should be tax-free.

The mutual fund industry is also hoping that the government allows income tax benefits on long-term mutual fund schemes such as retirement funds.

"We have seen in many developed markets that tax incentives have often been the catalyst to creating a long-term investing culture and ensuring consistent inflows into capital markets. There is no reason to believe that India will be any different," says Anthony Heredia of Morgan Stanley Mutual Fund.

As of now only two pension funds launched by mutual funds-UTI Retirement Benefit Pension Fund and Templeton India Pension Fund-give Section 80 C benefits.

However, Debashish Mallick says only Section 80 C benefit will not suffice. "Long-term schemes such as retirement funds should be tax-exempt at the time of maturity," says Mallick.

"Tax on maturity is crucial and probably the reason why pension received from the National Pension System was not tax-exempt in the I-T Act but will be exempt under the proposed Direct Taxes Code," says Vineet Agarwal, director, KPMG.

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