Budget 2014: Tax arbitration move worries mutual funds

Mumbai: The proposal to remove tax arbitration between investments in fixed deposit of banks and debt schemes of mutual funds is expected to hit the growth of the mutual fund debt schemes.

According to mutual fund experts, the proposal would make it less attractive for investors to park their money in debt market schemes offered by mutual funds, as it will reduce their rate of return from such schemes.

Currently, the capital gain arising on the transfer of units held for more than a year in a mutual fund debt scheme is taxed at a concessional rate of 10 per cent. On the other hand direct investments in banks and other debt instruments attract a higher rate of tax according to the applicable tax slabs since such interest income is treated as ‘income from other sources’ and included for the computation of the total taxable income of an individual or company.

“This arbitrage has hardly benefited retail investors, as their percentage is very small among such mutual fund investors. With a view to remove this tax arbitrage I proposed to increase the rate of increase on long term capital gains from 10 per cent to 20 per cent on transfer of units of such funds,” the finance minister said in his budget speech.

“This would prove as a dampener for the growth of debt schemes of mutual funds and its investors,” said Manoj Purohit, director, Walker Chandiok.

Kotak MF said that budget proposal would act as a major detriment for attracting incremental fund inflow.