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:
- Disparities within the Income Tax Act:
- 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
- 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.
- 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
- 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.
- While the following are not about income tax, but these come within the purview of the Ministry of Finance:
- 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.
- 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.
- 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.
- 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.
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.
