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New Direct Taxes Code to affect inflows into FMPs
March, 04th 2011

The Direct Taxes Code (DTC) which is expected to be effective from April 1, 2012 could affect inflows into the fixed maturity plans (FMPs).

This is because uncertainly looms over whether investments into FMPs, especially those which are launched at the fag end of the financial year, will continue to get double-indexation tax benefits for its investors.

According to the DTC, the holding period will start from the end of the financial year in which the asset is purchased, effectively taking away the double indexation benefits. Currently, FMPs are structured in such a manner that the term of FMPs is spread over two financial years, thereby enabling the investor to gain higher tax benefits.

Under the current tax regime, if investors buys 370-day FMP in March, 2011, investor is eligible to claim benefits of inflation for two years before calculating the capital gains tax liability. This is because till now all investments into a fund in a year were construed as being invested at the beginning of the financial year.

Thus, investments spread over two financial years in the above case, gave the investor the benefit of discounting inflation from NAV gains made for two years, which in other words is termed as double indexation.

However, once DTC comes in, investors would be eligible for only one-year indexation benefits with investments made in a year assumed to be made at the end of the financial year.

Shobhit Mehrotra, senior senior fund manager and Head of Credit at HDFC MF says, one year FMPs is a seasonal product, with launches usually made during the March period. However, this year theres uncertainty as to whether double indexation benefit will continue be available post DTC. This is because at the time of maturity, DTC will become effective. The current FMP investor also faces the risk of losing tax benefit.

In January alone, over 40 FMPs were launched and collected over R12,700 crore while market participants say that, over R10,000 crore have been raised in February. In year 2010, FMPs had collected over R72,000 crore.

Mahendra Jajoo, executive director and CIO, fixed income at Pramerica MF says, There is strong indication that DTC might be implemented in April next year. But we believe that, its implementation will be prospective in nature and thereby enabling current FMP investors to claim double indexation benefits.

At this time of the year, a little more than one-year FMPs are usually launched by fund houses. At higher yields of around 8.5-9.5% p.a, FMPs are currently being aggressively pushed by mutual funds as an alternative to bank fixed deposits.

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