What are the expectations of the Indian mutual funds segment?

The AMFI has been submitting a charter of demands to the Finance Minister each year ahead of the Union Budget. Even this year, AMFI has submitted its key demands pertaining to mutual funds. Here are some of the key demands.

Rationalize tax on mutual funds
There are broadly two major changes that are being demanded here. Mutual funds are a means of long-term financial planning and hence needs to be tax efficient. Firstly, there has been a need to exempt equity funds from long-term capital gains tax to help investors to create serious wealth. Secondly, the tax on dividends on equity funds is a major dampener. Since this amounts to virtual double taxation, it can be done away. With the rise of passive funds and FOFs, it is time to treat them favourably for tax.

Tweaking the ELSS story
Here, again, there are two stories to address. Firstly, it is a good move to allow passive ELSS funds in the market. However, the requirement to only issue passive ELSS in lieu of active ELSS is not a great idea. Ideally, both active and passive ELSS must be allowed for any fund as two distinct categories. Also, it is a demand that debt funds also be given tax-free status as DLSS with the appropriate lock-in. FM can also look at a dedicated tax exemption, over and above the Section 80C limits so that the mutual fund route gets a big boost.

Reinvesting money in MFs
In the past, there used to be two Income Tax sections for exemptions on capital gains reinvested in mutual funds viz Section 54E and 54F. Both these IT sections were scrapped in the year 2000 and replaced with Section 54EC, which only gives this reinvestment exemption to infrastructure bonds. As a result, the mutual funds stopped getting the flows from capital gains, that they used to get in the past. It is time to reintroduce the section once again. MF flows are seeing a lot of traction and it is time the budget gave an added boost by bringing back the old section to facilitate the investment of capital gains into mutual funds.

Ensuring parity with ULIPs
The AMFI charter of demands has spent a lot of ink on parity with ULIPs. These ULIPs are sold as insurance policies but are actually investments with a small insurance component. However, there are two areas where ULIPs enjoy a tax edge. Firstly, ULIPs are allowed to shift from one scheme to another under the same fund without any tax implications. However, for mutual funds, even a shift from a regular plan to a direct plan entails capital gains. Secondly, the terminal maturity or redemption value of ULIP is fully tax-exempt, like insurance. But, mutual funds attract tax on any capital gains earned on redemption. This puts the MFs at a disadvantage. It is time to bridge the gap in Union Budget 2023!

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