Mutual Fund marketers are hoping that the scope of section 80C is increased so that investors can invest more in ELSS schemes. Currently, the ceiling is R1 lakh with an additional R20,000 allowed for investments in infrastructure bonds. MF players also hope the finance minister reduces dividend distribution tax (DTT) on income funds. They also hope that norms for investments in mutual funds by qualified foreign investors (QFI) are eased and that taxes for feeder funds investing overseas are rationalised.
Speculation is rife that STT rates may be brought down in this Budget, which will benefit mutual fund investors, who currently pay an STT of 0.125% for delivery-based transactions of units of equity oriented mutual funds (EOFs). EOFs are classified as funds that invest at least 65% of their corpus into equities.
A reduction in STT will boost investor sentiment and lead to better participation in the capital market at a time when equity funds are seeing redemption pressure owing to sustained volatility in the market.
Market participants expect an increase in the maximum investment limit under section 80C and a proportionate increase in the existing ELSS investment limit of R1 lakh. Equity- linked savings schemes (ELSS) currently enjoy a deduction of R1 lakh for individuals and HUFs. This deduction is proposed to be done away with when the direct tax code (DTC) comes into effect, a move that is likely to hit sentiments. So, industry participants are hoping for an announcement this Budget indicating a status quo.
Experts believe that the process of fulfilling KYC requirements and filing returns for QFIs ought to be made simpler. ?There needs to be more clarity on the taxation front as well if the government wants to attract these investors,? said Dhruva Chatterjee, senior research analyst, Morningstar India. Several Indian funds are launching feeder funds that invest in global markets like the US but are not categorized as EOFs even if they invest more than 65% of their corpus into equities. ?As the market matures, more and more investors will opt to invest in such funds. But the unfavourable tax treatment could prove to be a deterrent,? said Chatterjee.
Capital gains taxes are unlikely to be tweaked this budget, believe market participants. At present, EOFs are subject to short term capital gains tax (STCG) of 15%. However, they are exempt from long-term capital gains tax (LTCG), which arises when the units are held for more than a year. Funds other than EOFs are subject to STCG at the full rate of 30% and LTCG at the lower rates of 20% with indexation or 10% without the indexation benefit.