Announcements regarding Government borrowing plans and the Direct Tax Code will be the key takeaways for the mutual fund industry this Budget. While not many industry specific announcements are expected, the industry will be keenly watching the measures taken with respect to the fiscal deficit.
“Increased Government borrowing will bring in more liquidity into the market. This will, in turn, help make projections for future debt market yields. Indirectly, it will also give an idea of the growth trajectory of our economy,” said Mr Killol Pandya, Head - Fixed Income, Daiwa Asset Management.
With respect to the Direct Tax Code, the industry is worried that it could lead to the withdrawal of certain tax benefits available to investors. At present, equity investments are exempt from tax for the retail segment.
“We would like to see the 80C status continuing for ELSS schemes. For all other equity schemes as well they should be accorded 80C status if the investor remains invested for five years. Dividends are currently tax free and we would want them to continue to be so,” said Mr Waqar Naqvi, CEO, Taurus Mutual Fund.
ELSS schemes
Under section 80C, individuals are allowed to invest up to Rs one lakh in tax-saving instruments, which is deductible from their income. ELSS or equity-linked savings schemes were one such popular instrument among mutual fund investors.
However, ELSS schemes which will cease to exist after the implementation of the Direct Tax Code, may be replaced by pension funds. “There is a likelihood that pension funds may be introduced for mutual funds for tax exemption. In such a case, ELSS schemes which were popular among investors may be more than compensated for,” said Mr Dhirendra Kumar, CEO, Value Research.
Another demand of the industry has been the alignment of taxation status in the fund of funds category with the underlying scheme, rather than the current debt status.
“An Equity FoF investor is essentially investing in equity schemes, and as such, should be able to avail of the tax benefits which would otherwise accrue to him/her, had they invested directly into those schemes. The rectification of this imbalance would greatly improve the acceptance of the product segment, as also bring the FoF investors at par with regular investors,” said Mr Sandesh Kirkire, CEO, Kotak Mutual Fund.