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Guest Column A letter to the finance minister:

A letter to the finance minister:

Here are Amit Trivedi’s suggestions to the Union Finance Minister Arun Jaitley on Budget 2018.
Amit Trivedi Feb 8, 2018

Dear Sir,

In your budget speech, when you introduced tax on long term capital gains from equity and equity mutual funds, you also introduced tax on dividends from equity mutual funds to bring parity between growth plans and dividend reinvestment plans. That was great thinking on the part of you and your team.  The tax law should not provide undue advantage to any section due to tax arbitrage, unless there is a social agenda like promotion of a backward area, or supporting an employment generating industry, etc. Tax incentives can also be used to promote a certain good behavior, e.g. saving for retirement or buying health insurance, or investing in one’s own house, etc.

Removal of disparity should be part of the strategy. However, there is a possibility of missing out on some disparities, which should be brought to the notice of the competent authorities. This is a humble attempt at that:

  1. Disparities within the Income Tax Act:
    1. While the budget introduced long term capital gains tax on equity shares and equity mutual funds, Unit-Linked Insurance Plans still remain outside the ambit of the same. There is a need to restore parity here. In the absence of that, there is a possibility of investors getting wrong investment products
    2. All investment advisors and academicians understand that diversification is a good investment strategy. The income tax act needs to be amended to nudge investors towards diversification. One area that stands out is the bonds v/s bond funds. Capital gains arising out of investing in bond funds (or debt funds, essentially non-equity oriented funds) would be considered long term if the investment has completed three years. On the other hand, if one sells individual bonds or debentures on stock exchanges, the gains are long term on completion of one year. This actually means that a concentrated investment receives better tax treatment as compared to a diversified portfolio. This disparity may be removed through appropriate changes.
    3. The withdrawals from NPS are taxed, but those from pension some other products are tax exempt, e.g. Public Provident Fund or pension plans launched by insurance companies
    4. Let us look at some examples to see how the tax laws are applicable to Long Term Capital Gains:

Investment

Minimum holding period

Tax rate

Indexation benefit

Tax saving through investment in capital gains bonds

Equity shares and equity mutual funds

One year

10%

Not available

Not Available

Unit linked insurance plans

One year (though, there could be longer lock-in periods)

Nil

Not Applicable

Not Available

Debt funds

Three years

20%

Yes

Not available

Listed Debentures

One year

20%

Yes

Not available

Real estate (land or buildings)

Three years

20%

Yes

Available

Other assets like jewelry, gold bars, coins, etc.

Three years

20%

Yes

Not available

Additionally, equity shares and equity mutual funds also attract STT, which is not applicable for the other avenues.

There are too many disparities in case of only capital gains. The purpose behind such disparities does not seem to be clear.

  1. While the following are not about income tax, but these come within the purview of the Ministry of Finance:
    1. The sales and marketing guidelines or the advertising code applicable to mutual funds is extremely stringent, but the same for investment-linked insurance products or the pension products is not so stringent. The law should be the same for all categories of products reaching a particular section of the investors. There should be no disparity.
      1. Take for example: Mutual funds are subject to market risks v/s insurance is a subject matter of solicitation. While the former generates fear in the minds of investors, the latter makes no sense to the reader. The Unit Linked Insurance plans do not have to talk about market even if they invest in equity, but mutual funds must highlight the market risk even if the investments are in money market securities.
    2. While discounts are not allowed for mutual fund and insurance products, the same are offered when the Government of India disinvests its stake in various companies, or when the ETFs (like the CPSE ETF or the Bharat 22 ETF) are launched.

I would only think of just a few at this juncture. Can there be more? I am not sure, as I haven’t spent enough time. I propose an expert committee may be formed to study all disparities and then the same may be discussed among the various constituents including the ministry, various regulators, market intermediaries, investors, et al.

The committee’s objective should be to bring parity across all sections.

The author is a trainer in financial markets. He has authored a best-seller book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”. His next book “Sabse Bada Rupaiya” that draws personal finance lessons from Bollywood is coming soon. The views expressed above are his personal views.

20 Comments
D B DESAI · 3 months ago
Great work Sir. The logic given behind this tax is to collect tax from rich is also flawed. A super rich might not have invested in equity or equity funds or may invest to earn less than 1 lac gain and will be free from tax and a retired person, small businessman, housewife may earn more than 1 lac in equity gains and will be taxed. It is wrong to define rich and poor on the basis of 1 lac gain in equity investing.STT dos not differentiate in rich and poor and is applicable to all. It's chaos.
Nikhil Thakker · 3 months ago
Excellent work done of realising trutg. Really superb and appreciate your efforts Sir.
bimal · 3 months ago
Great. just want to point out that long term capital gains on real estate will be 2 years.
SPS · 3 months ago
Great points of comparison, especially the marketing guidelines is really needed, why say 'market risk' ??
please tweet it to FM & other ministers in FM..
ANKUR AGARWAL · 3 months ago
LONG TERM CAPITAL GAIN and DDT should be exempt on equity, atleast for individuals
sanjay doshi · 3 months ago
the government needs money . this was expected
C Narayan Rao · 3 months ago
I agree to this view of exempting individuals since FM's aim is to discourage companies investing in mutual funds rather than investing in developing their business.
Reply
DINESH MAHAJAN · 3 months ago
Nice work. I think even 10% LTCG is not bad, but limit should be around 5 lacs and marketing part require the special attention.
Sanjay doshi · 3 months ago
In ULIPS and traditional investment plans the lock in or holding period is 5 years. However, if one discontinues / stops paying premiums, within the first 5 years ,then the value in ULIPS is based on the cut off NAV and will fetch interest at 4% p.a. till the expiry of 5 years. this rule came in some years ago.
Rajendra Kumar Rath · 3 months ago
Sir,Good analysis.In my view Investors will look for tax benefits for investment, so that their investments can fulfill their wide range of goals. In (ULIP), no LTCG tax is given. ULIP invests also in market with one objective( life insurance). Govt may introduce similar MF schemes by MF fund houses with no LTCG tax but with multiple goals to achieve. Otherwise, investors will only go for ULIP schemes there by narrowing down their portfolios.With narrow portfolio can we the cmmon people be financially rich?Suggest.
Prashant · 3 months ago
This is an absolutely foolish argument because this person says that ULIP is a wrong investment product which is absolutely false. Secondly he says pension from insurance companies and providend funds are tax free which again is false. He also says that sales and marketing guidelines are stringent in mutual funds and not in ULIPs which again is a wrong argument. He should get his facts right before writing these letters.
SANDEEP BIYANI · 3 months ago
So Nice
SANDEEP BIYANI · 3 months ago
So Nice
Indrajit Sarkar · 3 months ago
Sir,
You are done great job.
Support you boldly.
Niladri saha · 3 months ago
So nice.
Avinash Dodal · 3 months ago
THERE IS CARRY FORWARD FACILITY FOR LONG TERM CAPITAL LOSS IN REAL ESTATE. WHAT ABOUT LONG TERM CAPITAL LOSS IN EQUITY?
SUDHAKAR V GAONKAR · 3 months ago
MISSELLNG OF ULIP PRODUCTS MAY GET DRIVE AGAIN DUE TO LTCG BENEFIT OVER EQUITY MUTUAL FUND PRODUCTS .

SINCE MARKET RISK IS COMMON FOR BOTH THE PRODUCTS , PRODUCT CATEGOLGUE OF ULIP ALSO SHOULD HAVE HIGHLIGHTED " RISKOMETER " FOR LAYMAN TO UNDERSTAND RISK ASSOCIATED WITH PRODUCT LIKE MUTUAL FUND CATELOGUE.

BOTH THE REGULATORS ( IRDA & SEBI ) SHOULD COME OUT WITH SAME LINE AS FAR AS MARKET RISK & COMMISSION DISCLOSURE IS CONCERN TOUGH INSURANCE IS PUSH PRODUCT .
Yvs suresh · 3 months ago
If the customer complaints that insurance is Mis sold to him by the agent, the policy should be cancelled and claw back should be applicable. And also action against the people who are involved to sell such product. And as the brokerage is being informed to the customer in case of mutual funds, similarly the commission also should be mentioned in the policy document.
Anand Jain · 3 months ago
After Demonetisation and GST Income tax collection has gone up by 19% due to more individuals coming under tax net but their target of collecting instant tax by demonetisation has failed and that money is moving towarda MFS and equity now FM want to achieve it by taxing common man thru LTCG. and all pain should be beared by common man.
Anup Agarwal · 3 months ago
Great Efforts Amitji. Pl also discuss the issue that why B15 & T15 NAV is same. My question is "WHY AN INVESTOR OF T15 SHOULD PAY EXPENSE OF A B15 INVESTOR". Pl calculate a separate NAV for B15 investors and also refund the amount deducted (of a T15 investor) so far due to this discrepancy.

Regards,
Anup Agarwal
nILESH BHUPAT MEHTA · 3 months ago
Great Efforts Amitbhia. LTCG limit should be increased or charge @5 % with minimum holding of 3 years.
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