Different sections of the economy are giving diverse views on the union budget 2015-16. While some are calling it bold and satisfactory; others are disappointed with the effort of the finance minister. If any industry that has benefited considerably even before the NDA Government completed 3 months of its working period that was the mutual fund industry. Modi-led NDA coming to power was an enough reason for capital markets to cast off gloom. Retail investors were exiting mutual funds till then, who then started coming back to markets and investing in mutual funds again.

Being hopeful of receiving support from the Government to grow faster, mutual fund houses anticipated some favourable announcements in key areas of their operations. But in the end, the mutual fund industry might feel that the budget fell short of its expectations as there have been no significant announcements for the industry. On the contrary, some proposals made in the budget 2015-16 may work to the disadvantage of mutual funds. So, what has changed for them? Let’s have a look.

No separate deduction for Equity Linked Savings Schemes (ELSS): Mutual funds were expecting that ELSS funds may be allowed to provide additional tax incentives over and above the limit of Rs 1.5 lakh allowed u/s 80C. Mutual funds may be disappointed that the budget 2015-16 didn’t provide any such incentive. PersonalFN believes, by remaining silent about providing additional tax incentives for ELSS mutual funds over and above those provided u/s 80C; budget suggested that, no favour would be done to any industry by being unjust with the other.

Arbitrage funds would continue to enjoy tax favourable treatment: Last budget had changed the tax treatment for non-equity funds making debt funds unattractive from the taxation perspective. Arbitrage funds have a risk-return potential comparable with that of an ultra-short term fund. Despite of that, arbitrage funds continued to enjoy favourable tax treatment. Therefore, it was expected that this time finance minister would plug the loophole by treating even the arbitrage funds on par with debt funds for the taxation purpose. Budget 2015-16 kept this issue unattended.

Capital gains arising due to merger of schemes wouldn’t be taxed: Giving some respite to investors; budget 2015-16 rationalised tax treatment for mutual funds. It has been clarified that at the time of merger of any scheme, allocation of new units to investors of the merged scheme won’t be considered as fresh buying. Merger of two or more schemes were otherwise considered as two different transactions earlier for investors; i.e. exit from a scheme and buying units in new schemes. Investors holding units for less than 1 year in case of equity funds and less than 3 years in debt funds were liable to pay short term capital gain tax on their investments for no action from their side. PersonalFN believes, this may allow seamless merger of schemes without putting investors at any disadvantage.

Now service tax would be collected on the income of mutual fund distributors: There is some bad news for distributors of mutual funds. Government has proposed to impose 14% service tax on their income. It may prove to be negative for overall growth of mutual funds in India, as they still remain a product that is aggressively sold than actively bought.

PersonalFN is of the view that, educating investors is one of the most important aspects for creating awareness about mutual funds and persuading them to invest in mutual funds after considering their financial goals, time horizon and risk appetite.

Add Comments