Debt schemes get a blow from budget

The union budget has proposed a 30 per cent tax on income distributed to corporate in money market and liquid schemes, experts feel that the move will impact the inflows

Mumbai: While the Indian mutual fund industry cheered the opening up the entry gate for FIIs in equity schemes, the proposal of 30 per cent tax on income distributed to corporates has raised concern.

Mutual funds currently pay additional income tax on the amount of income distributed to investors as per section 115R (2) of the Income Tax Act.  The union budget has proposed an additional higher rate of 30% on income distributed by debt funds. Money market or liquid schemes will pay 25 per cent tax in case of a dividend distributed to individual or HUF and 30 per cent for corporates. Further, 12.50 per cent tax has been proposed for debt schemes in case of individuals and HUF and 30 per cent for corporates.

“In specific announcements for the Indian mutual funds industry, the dividend distribution tax on debt schemes has been enhanced to 30% plus surcharge. This will eliminate the tax arbitration between debt MFs and alternative debt products,” said Mr Sandesh Kirkire, CEO, Kotak AMC.

“We will closely watch the impact on inflows from domestic corporates into fixed income funds due to the changes on the dividend distribution tax which are likely to come into effect on 1 June 2011,” said Ashu Suyash, Managing Director, Fidelity Mutual Fund.