AMFI has requested the Union Finance Minister, Arun Jaitley, to do away with the tax incidence if an investor exercises a switch option between growth and dividend options within the same scheme of a mutual fund.
Currently, intra-scheme switch transactions, i.e., switching of investments in units from growth option to dividend option, or vice versa, within the same scheme of a mutual fund attract capital gains tax. Simply put, it is considered as redemption and then reinvestment instead of transfer.
AMFI said that similar schemes such as ULIPs do not attract capital gain taxations in such a transaction. “To have a level playing field and uniformity in taxation of investment in mutual funds and ULIPs of insurance companies, it is proposed that in case of Intra-scheme switches (switching of investment within the same scheme of a mutual fund) be also not regarded as a transfer under section 47 of the IT Act, 1961 and be exempt from payment of capital gains tax.”
Among other key proposals for the MF industry are:
- Issue clarification on exemption given to mutual funds on applicability to pay dividend distribution tax at scheme level if such an amount exceeds Rs.10 lakh.
- Inclusion of mutual funds among specified long term assets qualifying for exemption on long term capital gains under Section 54 EC. Under this section, long term capital gains arising out of sale of residential property are exempted from capital gains tax if such proceeds are invested in the specified fund notified by the government. Currently, banks offer a product where investors can invest up to Rs.50 lakh with a lock-in period of three years.
- Uniform taxation of listed debt securities and debt funds. Currently, investors have to stay invested for one year to avail of the long term capital gains tax in listed debt securities. However, in mutual funds, investors have to wait for three years to avail of such benefits.
- Inclusion of fund of funds investing in equity funds of foreign countries under equity funds. Fund of funds come under debt funds for taxation.
- Tax exemption on DDT should be given to institutional investors such as EPFO, NPS, Insurers and NGOs. “While waiving DDT in respect of Tax-exempt institutional investors would not affect the Government’s revenue, it would eliminate arbitrage between incomes earned from MFs/MF-IDFs vis-à-vis other interest-bearing financial instruments,” said AMFI.
- Uniform taxation norms of Infrastructure debt funds of mutual funds and NBFCs. While interest paid by NBFC under IDF structure are subject to TDS of 10%, IDFs offered by MFs attract dividend distribution tax affecting net returns from MFs.
- Give pass through status to Category III Alternative Investments Funds (AIFs) also known as hedge funds, long only funds and long and short funds.
