The mutual fund industry is seeking to get tax relief on debt schemes and a solution to the issue of treating Fund of Funds schemes on par with equity schemes from this Budget. The decisions, it expects, will boost retail participation in these schemes.
The debt-oriented mutual fund schemes, at present, pay around 12.5 per cent and institutional investors pay 23 per cent distribution tax plus surcharge and cess on the premium they earn on their investment, while equity-oriented schemes are exempt from these taxes.
The industry in its wish list, which it submitted to the finance ministry, sought nullification or reduction of this tax.
"We expect the government to take a call on this issue. If the tax limit is brought down, we will be able to attract far more retail investments that, at present, go to conventional investment sources," a fund manager with a top-performing debt scheme said.
Investments made by institutional investors in debt fund schemes are three times the retail participation. This is the opposite in the case of equity or balanced schemes. The mutual fund industry has been concerned over this minuscule institutional participation in equity schemes.
Debt funds are struggling hard to keep their market share intact against the rising deposit rates offered by banks.
"There are a couple of things which need to be harmonised. Firstly, the FoF schemes investing in equity-oriented schemes should be given tax benefits like no dividend distribution tax and tax free long term capital gain. Besides this, we expect the government to reduce tax on debt fund investors, who pay around 14 per cent of their gains as dividend distribution tax," the Association of Mutual Funds in India chairman AP Kurian said.
FoF schemes invest their money in other mutual fund schemes and rotate their investments as per the performance of those mutual funds. These fund schemes are not directly invested into the equities or debts.