Continuing with its yearly practice of releasing a wishlist ahead of the Union Budget, AMFI has released a set of proposals on behalf of the mutual fund industry for this year.
Among various proposals, one set of demands that has featured prominently for the last few years is the request to bring parity in tax treatment of various investment instruments.
According to the industry body, mutual funds are at a disadvantage on the taxation front compared to other investment options like debt securities, ULIPs and even FDs.
Here's how mutual funds stand against other the three investment avenues listed above and what changes AMFI has sought.
Mutual funds vs ULIPs
ULIP investors enjoy tax exemption under Section 10 (10D) if the annual premium is up to Rs 2.50 lakh. However, there is no such limits in mutual funds. Currently, the long term capital gain is taxed at 10% on gains exceeding Rs 1 lakh in a year. Short term gain is taxed at 15%.
For debt funds, short term gain is taxed as per investor’s tax slab. For long term investment, the tax rate is 20% but it comes with indexation benefits.
Listed debt securities vs debt mutual funds
Investors are required to stay invested in debt-oriented mutual funds for at least 36 months to avail long-term capital gain (LTCG) taxation benefits.
For listed debt securities like bonds, government securities and zero coupon bonds, the minimum holding time period is just 12 months.
AMFI has requested the government to set a uniform holding time for LTCG benefits by setting the minimum holding period for taxation benefits at 12 or 36 months for both the options.
"Many HNIs are understood to have shifted their debt investments to listed zero coupon bonds, and thus managed to reduce their tax liability from peak rate of 43% to 10 % under LTCG. Thus, there is a need for harmonizing the tax treatment on investments in debt oriented MFs and direct investments in debt securities," AMFI said.
Mutual funds vs FDs
Dividend income from mutual funds face 10% TDS (tax deducted at source) if the payout exceeds Rs 5,000 in a year.
In case of bank FDs, the threshold for TDS deduction on interest income is Rs 40,000.
AMFI has requested the government to set a similar threshold in case of mutual funds. The industry body has mentioned a figure of Rs 50,000.
