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  1. Budget 2018: Why tax on equity mutual funds won’t hurt flows

Budget 2018: Why tax on equity mutual funds won’t hurt flows

Budget 2018: The government’s decision to impose a 10% tax on distributed income by equity-oriented mutual funds is unlikely to impact the flow of money into the mutual funds industry, experts said.

By: | Updated: February 2, 2018 2:55 AM
Budget 2018: I see assets under management of the Indian mutual fund industry at around Rs 30 lakh crore in the next three year, “ said Sunil Subramaniam, CEO, Sundaram Asset Management Company. Budget 2018: I see assets under management of the Indian mutual fund industry at around Rs 30 lakh crore in the next three year, “ said Sunil Subramaniam, CEO, Sundaram Asset Management Company.

The government’s decision to impose a 10% tax on distributed income by equity-oriented mutual funds is unlikely to impact the flow of money into the mutual funds industry, experts said. “I do not expect any decline because at 10% rate of taxation, it still compares very favourably with the taxation rate on other investment options such as fixed deposits. The equity mutual funds are growing at a rate of 15-20%. I see assets under management of the Indian mutual fund industry at around Rs 30 lakh crore in the next three year, “ said Sunil Subramaniam, CEO, Sundaram Asset Management Company. The mutual fund industry’s assets under management has grown sharply in the recent years. The industry’s AUM jumped from Rs 10 lakh crore in mid-2014 to Rs 21.27 lakh crore as on December 31, 2017, data from the Association of Mutual Funds in India showed. Net inflows in equity mutual funds stood Rs 1.32 lakh crore in 2017, while it was Rs 51,000 crore in 2016.

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Under the new tax structure proposed in the Budget 2018, an investor would be charged 10% tax on the dividend he earns his from mutual fund investments. Other gains from the mutual fund investment would be taxed as per the long-term capital gains tax norms.
“Introduction of a 10% dividend distribution tax on dividend options of equity funds to bring them on a par with the growth schemes may impact flows into funds where investors were primarily entering with the expectation of regular dividends,” said Kaustubh Belapurkar, director — manager research, Morningstar Investment Adviser India. In the past few months, we have seen fund houses giving monthly dividends under balanced schemes, and these might be adversely impacted.

Read: Budget 2018 impact: Here is how you will save, invest, borrow, and insure; all you want to know

Income tax Calculator: Calculate impact of Arun Jaitley’s Budget 2018 on your tax liability

However, industry experts said 10% is a very nominal rate of taxation and it will not deter long-term investors from putting their money in long-term equity mutual funds. Another positive is the fact that the tax is non-retrospective, which will prevent any knee-jerk selling in the market. “The tax will be levied only on incremental gains post-January 31, 2018. There is no retrospective element to the structure that they have announced. That is a good thing,” said Vetri Subramaniam, group president & Head-Equity at UTI AMC.

– Shamik Paul & Bhardawaj Sharma

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