The last budget was nothing short of a godsend for the risk-taking investor. The Section 80C (revised Section 88) benefit allowed investors to invest upto Rs 100,000 in tax-saving funds (ELSS). Compare that to the puny Rs 10,000 he could invest in tax-saving funds until last year.
If you ask us, the mutual fund investor, at least the equity fund investor, has a lot of things going for him right now. To begin with, he has never seen a 10,000-point market ever before, so if he was smart enough to have invested earlier on, he is probably one happy and wealthy individual right now.
That is not to say that it is the end of the road for new initiatives. Far from it. We believe there is scope to introduce a lot more innovation in the mutual fund industry both in terms of new products and taxation. We will deal with that later in the article, first lets do a roundup of what's on the mutual fund investor's plate at present.
Dividends
Dividends on open-ended, equity-oriented mutual funds (equity funds and balanced funds) are tax-free in the hands of investors. Fund houses are not required to pay a dividend distribution tax on them either.
Dividends on debt funds (which includes monthly income plans) to individuals and HUFs attract 12.5% distribution tax plus 2.0% surcharge. In case of corporates, the distribution tax is levied at the rate of 20.0% plus 2.0% surcharge. These dividends are tax-free in the investors' hands.
Capital Gains
Long-term capital gains on equity funds attract a 0.15% securities transaction tax (STT) on the cost of purchase.
Short-term capital gains on equity-oriented mutual funds are charged at 10.0%, while those on debt funds are levied at the tax slab applicable to the investor.
Initiatives
A major initiative announced in the last budget that is yet to take off is the gold exchange traded funds (ETF). While there are some launches being planned by Asset Management Companies (AMCs), the country is yet to see its first gold ETF.
Another product that one has heard much about but has yet to find its way in the industry is the real estate mutual fund, also referred to as Real Estate Investment Trusts (REITs). There are several real estate funds in operation at present, but these cater mostly to the institutional investor. The retail investor is still looking for an opportunity to invest in real estate funds.
What is likely to happen?
Dividends
We are of the view that dividends on open-ended equity-oriented funds are likely to remain tax-free. We are likely to see more clarification on dividends declared by close-ended equity funds.
At present there is little clarity on this front and AMCs are being conservative by factoring in a dividend distribution tax (12.5%+2.0% surcharge) in their calculations. We believe that the finance minister is likely to treat close-ended equity funds at par with their open-ended counterparts and make dividends tax-free.
Capital Gains
On lines of what happened in the previous budget, the securities transaction tax (STT) on equity funds could be revised upwards from the current 0.15% on the cost of purchase.
Initiatives
We are likely to see more clarity on initiatives that were announced earlier like Gold ETF. At present, the lack of clarification is a hurdle for AMCs to launch their offerings. On the same lines, we are hoping that there is a concrete plan to allow AMCs to launch real estate funds for retail investors.
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