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Currently, equity funds are taxed at 10% on long term capital gains of over Rs.1 lakh. LTCG is applicable after 12 months in equity funds.
AMFI said, “It is requested that the LTCG on listed equity shares or units of equity oriented fund schemes be exempted from capital gains tax if the equity shares / mutual funds units are held for at least 3 years by suitable amendments to section 112A, while other tax provisions under the said section may be otherwise continued as it is.”
If the proposal goes through, the holding period of LTCG in equity funds may be increased to 36 months from 12 months but the entire gains will be tax free in the hands of investors.
AMFI believes that this will encourage long-term investments in equities and will channelize more household savings into the equity markets, thereby helping the Indian economy.
While AMFI has repeated most of its previous demands in its budget wish list like introduction of debt linked savings schemes and mutual funds linked retirement plans, bringing parity between taxation of equity funds and ULIPs and so on, let us look at a few new proposals:
#1 – MFs should be exempted from paying any tax if consolidation happens between options like direct to regular and vice versa and growth to dividend and vice versa
AMFI has requested the Union Finance Minister to consider doing away with the capital gain tax on transfer of units from regular plan to direct plan and vice versa and growth plan to dividend plan and vice versa within the same scheme. AMFI said that there is no inflow/outflow of money involved in such switches. AMFI also pointed out that there is no such tax implemented on ULIPs.
#2 - ELSS investing should be allowed in any multiples
Investments in ELSS are made in multiples of Rs. 500 with a minimum of Rs. 500. Fund houses have to make a partial refund of the fractional amount or reject applications that are not in stipulated multiples. This causes avoidable inconvenience to investors, including loss of investment opportunity/income tax benefits, apart from additional operational work for MFs, said AMFI. It said that ELSS investing should be allowed in any multiples.
AMFI believes that the proposal will not result in revenue loss but will mitigate the hardship to investors and MFs.
#4 – Holding period of LTCG in debt ETFs should be reduced to 12 months
AMFI has requested that the government should bring parity on tax treatment of debt ETFs and debentures as both are listed on stock exchanges.
Currently, holding period of LTCG in debt debenture is 12 months whereas such a holding period in debt ETF is 36 months.
“Reduction in the minimum period of holding for units of Debt ETFs to 12 months would boost the retail participation in Debt ETFs,” said AMFI.
#5 – Holding period of LTCG in gold and silver ETFs should be reduced to 12 months
AMFI believes that the popularity of gold ETFs has been affected due to introduction of sovereign gold bond (SGBs). In such a scenario, it is imperative to make gold and silver ETFs more lucrative as both these instruments provide adequate liquidity to investors.
In this context, AMFI has requested the ministry that it should consider reducing holding period of LTCG in gold and silver ETFs to 12 months.
#6- Stamp duty should be charged at scheme level in ETFs
In ETFs, stamp duty is levied at multiple stages like creation of units with AMCs, underlying basket and purchase of ETFs. AMFI said that the government should levy stamp duty only once.
#7- Parity in STT of ETFs – intraday and delivery transaction
In ETFs, security transaction tax (STT) is lower in intraday trading compared to delivery transaction. In equity stocks, STT on non-delivery transactions is 0.025% and for delivery is 0.1% whereas for ETFs, STT on non-delivery transactions is 0.025% and for delivery it is 0.001%, which is an anomaly, as STT on intra-day should be lesser as compared to delivery trades helping improve liquidity.
The principle for applicability of STT on units of ETFs and on equity stocks should be made similar, said AMFI.
