At a time when the real estate sector is hard-pressed for funds, the real estate mutual funds (REMFs) are yet to take off, despite being granted permission three months ago. This is because of unclear rules regarding their tax treatment.
REMFs, which were touted as a major instrument enabling retail investors to participate in the booming realty sector, have been delayed partly because the Securities & Exchange Board of India (Sebi) and the finance ministry are still trying to sort out the taxability of such scheme.
The Central Board of Direct Taxes (CBDT) has agreed to provide it the same tax status as the equity oriented mutual funds, as was requested by the Sebi. This implies that the REMFs will be exempted from dividend distribution tax and investors spared from paying long-term capital gains while selling their shares.
However, according to the Income Tax Act 1961, equity oriented mutual funds are those which have at least 65% direct investment in securities of the listed companies.
Interestingly, under Sebis guidelines, REMFs must invest a minimum of 35% of their funds directly into real estate assets and the rest into mortgage-backed securities, debt and equity instruments floated by the realty companies, thereby making it difficult for them to qualify as equity oriented mutual funds.
As per the REMF structure laid out by Sebi, these funds would more-often-than-not be akin to debt funds, an expert said. Unlike equity-linked funds, debt-funds attract both capital gains tax and dividend distribution tax. This creates complications as investors are indirectly being denied the tax incentives given to equity oriented funds, the officials said.
For a clearer understanding and in order to include REMFs, the finance ministry will have to change the definition of equity oriented mutual funds in the IT Act, Ajit Krishnan tax partner (real estate), Ernst & Young said. He added there were other issues, which were delaying the launch of such schemes.
Analysts note that apart from taxation issues, the instrument is not gaining currency because of a weak stock market. Stocks of real estate companies have been battered badly in the recent months. The outlook for real estate sector is so bleak that no one wants to float REMFs, says Dhirendra Kumar, CEO, Value Research India Pvt Ltd, a mutual fund research firm.