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Informist, Tuesday, Jul 30, 2024

 

NEW DELHI – The Association of Mutual Funds in India today asked the government to roll back some of the tax changes on mutual funds that have been put forward in the Union Budget for 2024-25 (Apr-Mar). First among these was reversing the increase in capital gains tax. 

 

Short-term capital gains tax has been increased to 20% from 15%, while long-term capital gains tax has been raised to 12.5% from 10%, in the Budget proposals for 2024-25. The mutual fund body asked the government to reinstate the older capital gains tax regime as the increase in tax liability of investors was large: over 30% in the case of short-term gains, and 25% in the case of long-term gains.

 

For mutual fund investors, securities transaction tax on sale of an option should be retained at 0.0625% and on sale of futures at 0.0125%, AMFI said. Finance Minister Nirmala Sitharaman in the Budget proposed an increase in the securities transaction tax to 0.1% of the option premium on sale of options and to 0.02% of the price of futures on sale of futures in securities. The Union Budget is currently being discussed in Parliament and has not yet become law, though the hike in securities transaction tax is proposed to come into effect from Oct 1.

 

This will hit certain categories of funds which will already be hurt by the increase in short-term capital gains tax. "Arbitrage Funds and Equity Savings Funds mainly use Futures and Options for hedging as the underlying assets... Further, the increased STT on futures will add to the cost of these funds," AMFI's note today said.

 

As for retrospective implementation of capital gains tax between 2018 and 2024, AMFI asked the government to either grandfather in prior investments or provide indexation benefits to debt mutual funds. If the removal of indexation benefit is not reconsidered, the government should at least provide for the holding cost of debt mutual funds to be indexed till Jul 23, when the Budget was presented, the note said.

 

Gains from debt mutual funds since Apr 1, 2023 have been taxed at the investor's income tax slab rate. AMFI also asked the government to roll back changes made to debt mutual fund taxation last year, and put them on a par with listed instruments which attract a long-term capital gains tax of 12.5% after 12 months of investment. "We need active participation by the retail investors in these markets which will not only help them in diversifying their investments but also in garnering inflation adjusted returns," the note said.

 

For debt investments, the mutual fund body asked for grandfathering – or exempting – investments made before 2023. Further, it proposed grandfathering up to 2024 for investments made by schemes investing more than 65% in debt instruments. For equity investments, the grandfathering clause already applies to tax changes made after 2018 – AMFI asked that these be extended to 2024.

 

"We believe that applying the new tax rates on a retrospective basis can be detrimental to investor confidence and deter new investors from entering capital markets as well as the existing ones to make further investments in the capital markets through mutual funds...," the note said. "Further, FPIs (foreign portfolio investors) also get impacted by such sudden changes in taxation, especially if implemented on retrospective basis."

 

Other proposals were related to the special taxation regime for market linked debentures and specified mutual funds introduced in the Finance Act, 2023. These instruments were deemed to be taxed under short-term capital gains regardless of the holding period under a new Section 50AA of the Income Tax Act. In the latest Budget, unlisted bonds and debentures were added to the purview of this section of the Income Tax Act.

 

Specified mutual funds include funds investing more than 65% in debt/ money market instruments or funds which invest more than 65% in units of the above funds, according to the Union Budget 2024-25. The threshold for the latter should be increased to 90%, as investors will lose out on long-term capital gains benefits at a much lower threshold than the government intends, AMFI said.

 

The government had amended the definition of these specified mutual funds as it was unintentionally hurting some fund-of-funds, exchange traded funds, gold mutual funds and gold exchange traded funds which had less than 35% investment in equity instruments, the prior threshold for being taxed under short-term capital gains. As for the applicability of this definition, the government should opt for it with "immediate effect" rather than the proposed date of Apr 1, 2026, AMFI's note said.  

 

"The anomaly that was created by the wordings included in the last budget had adversely impacted the tax implication for investors in these funds, and they have to be provided immediate relief," the mutual fund body said. "Continuing with the anomaly for another two years will only add to the investor woes and penalise them unfairly."  End

 

Reported by Aaryan Khanna

Edited by Deepshikha Bhardwaj

 

 

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