Bad News in Disguise

Posted On Friday, Aug 08, 2014


Recently Finance Minister Arun Jaitley ruled out retrospective application of the Budget proposal to double the rate of capital gains tax on debt mutual funds from 10 per cent to 20 per cent.

In our earlier communication we outlined as to why the budget was not fair for non-equity investors (Not so 'Acche Din' for non-equity investors), now that the Finance Minister has announced the revision of rules affecting non-equity funds things have started looking a tad better.

Here’s our take on the new rule

Retrospective effect - bad move - rectified!

The industry was worried that the government will have a apply tax retrospectively, but as the new government tries to holds its promise of “Acche din” they at least rolled back the retrospective effect. The new Finance Minister proposed an amendment to the effect that redemptions made till July 10 in the current financial year would be exempted from the new tax rules. However it is the investors investing in FMPs that will predominantly be benefitted from the rollback considering that the major chunk of debt mutual funds assets come from this segment.

The rule to raise the minimum investment period for being considered long-term capital gains from 12 months to 36 months still stays. Similarly long term capital gains tax on non-equity funds has been raised to 20% from the earlier rate of 10%.

Removing the Tax Arbitrage of FMPs- Good move

How has the new rule changed the life for FMPs and fixed deposits?

The ability to avail of the tax arbitrage opportunity between FMPs and fixed deposits has been removed. This has made FMPsand fixed deposits come almost on par, at least on the tax front. This move follows the recommendations of the Urjit Patel Committee report that said, “all fixed income financial products should be treated on par with bank deposits for the purpose of taxation and TDS. Further, the tax treatment of FMPs and bank deposits should also be harmonized”. However the new tax rules have done more than remove the tax arbitrage between FMPs and bank deposits, and have gone ahead to give all non-equity mutual funds similar tax treatment as FMPs.

Yet debt funds will still make a viable option for retail investor as fixed deposits might give you fixed return, debt funds have potential to give better returns, as compared to an FD with high risk than FD. An investor can start the investment in debt funds without necessarily having to decide what period he is investing for, giving the investor more flexibility; also open-ended funds are high on liquidity – investor can redeem his investments any time just at a day’s notice.

If we had one wish, Mr. Finance Minister it would be...

The one thing that probably needed most attention but yet remains ignored is the fact that all non-equity funds are treated as debt funds for the purpose of taxation in the Mutual Funds space. May it be the multi asset funds, equity fund of funds, gold funds, etc. cannot be clubbed under one umbrella for the purpose of taxation since the purpose of each type of funds is different. Any rule applicable to debt funds may not be applicable to other non-equity funds. Rather, these funds should be considered according to their portfolio. For example a portfolio of Equity Funds - an Equity Fund of Funds is categorized as a non-equity fund whereas it should ideally be an Equity product since all the underlying funds of the fund of funds portfolio are all equity funds anyway.

We remain optimistic and hope there is soon some clarity and bifurcation from a taxation perspective in the now cluttered non-equity funds category. This bifurcation could encourage retail investors to look at other non-debt related schemes as investment options.

Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – to read scheme specific risk factors.

Above article is authored by Quantum.

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