Tax exemption on scheme mergers, allowing mutual funds to launch pension products (401 k type schemes) find no mention in the Union Budget 2013.
Though the Union Budget 2013 provided minor relief to the mutual fund industry, key areas like allowing AMCs to launch 401 k type pension products, giving tax relief on scheme merger and tweaking tax status on fund of funds, which are currently taxed as debt funds, remain unresolved.
In mutual funds, if scheme A is merged with scheme B, then it is treated as redemption by unit-holders of scheme A and issue of units of scheme B to them is considered as purchase of new units. The investors of scheme A are liable for capital gains tax as it is considered as withdrawal.
AMC has to pay a STT of 0.25% if schemes are merged while investors who choose to exit from the scheme which is getting merged have to pay capital gains tax. “SEBI wants AMCs to merge overlapping schemes. The industry had demanded exemption of tax on scheme mergers which has not been met,” said Deepak Chatterjee, MD & CEO, SBI Mutual Fund.
“We were hoping that FM would allow mutual funds to launch a 401 k type schemes. Allowing pension funds to invest in mutual funds may not be a big boost for the industry. Also, RGESS can only be launched as close-ended funds and through ETFs. The budget should have allowed us to launch open ended RGESS just like ELSS,” adds Deepak.
“Lack of big bang reforms and specific measures to address the current issues seemed to have weighed on market sentiments. The hike in exemption limits and increased rural spending gave a boost to FMCG stocks. The reduction in STT on delivery on delivery transactions is a positive for brokerages,” said Sivasubramanian KN, Chief Investment Officer, Franklin Equity – India, Franklin Templeton Investments.
The FM made minor tweaks to Rajiv Gandhi Equity Savings Scheme (RGESS) by raising the income slab of qualifying investors to up to Rs 12 lakh from Rs 10 lakh. These investors can now invest for three successive years. “It will certainly attract more investors in equity market/mutual funds. Introduction of Inflation Index Bonds and additional relief on housing loan interest will attract small tax payers. DTC not coming so soon is also a welcome sign,” said Nilesh Sathe, Director & CEO, LIC Mutual Fund.
Though there were no major announcements for the equity markets, the move to slash securities transaction tax has been welcomed by market participants.
- ETF redemptions at fund counters: from 0.25 to 0.001 percent
- ETF redemptions on exchanges: from 0.1 to 0.001 percent, only on the seller
“Overall the budget is very pragmatic. Some of the steps regarding Infrastructure Debt Funds, clarity on FII & FDI investments, reduction in STT and broad basing RGESS will help the industry. Though, there were no big bang announcements for the mutual fund industry,” said Gopal Agrawal, CIO, Mirae Asset Mutual Fund.
While the FM said that investors can buy insurance schemes on the basis of bank KYC, this benefit has not been extended to mutual fund investors. But the FM did make a case for unifying KYC norms across all financial regulators.
“The positives for mutual funds from the budget speech include a reduction of STT rates for equity oriented funds and liberalisation of the Rajiv Gandhi Savings Scheme. The concerns raised by the industry around taxation of securitisation trusts and parity of DDT rates in infrastructure funds appear to be have been addressed, while the requests around tax exemption on scheme mergers and safe harbour rules for onshore fund management do not seem to have been accepted,” said Gautam Mehra, Leader, Asset Management Practice, PwC India.
Another positive for the mutual fund industry has come in the form of allowing pension and provident funds to invest in exchange traded funds and debt mutual funds. It remains to be seen if more fund houses will rush to launch ETFs in order to get inflows from pension funds.
Click here to read the budget speech.
