The forthcoming Union Budget is likely to have some good news for common tax payers and investors. According to several fund managers and investment experts, the new government is likely to offer some sops to tax payers to boost long-term savings. Of course, like every year, everybody is expecting a hike in the tax exemption limit under Section 80C. Similarly, fund managers are also hopeful of securing an exclusive tax break for the recently introduced mutual fund-sponsored retirement plans. Sadly, arbitrage funds are likely to lose their charm. These schemes are likely to be classified as debt funds, and this will take away the tax advantage they currently have over debt funds. On the other hand, funds of funds that invest most of their money in equity are likely to shed the tag of debt funds as these may be finally classified as equity funds for taxation purpose.
A Balasubramanian, CEO, Birla Sun Life Mutual Fund, believes that the Budget will have some happy news for the mutual fund industry. He is expecting the finance minister to exempt the merger of mutual fund schemes from the securities transaction tax (STT). "It [the merger of mutual fund schemes] is currently treated as redemption. We believe it may be considered an M&A (merger and acquisition) activity," he says. He also believes that the government is likely to enhance the Section 80C limit and may offer an exclusive section or limit for the retirement plans from mutual fund companies.
Section 80C of the Income Tax Act always comes into focus before every Budget. The Section allows tax exemption of up to ₹1.5 lakh on investments in a permitted list of investments. This amount is considered too little for salaried tax payers to plan any long-term savings. This year also many fund managers are hoping for a further hike in the exemption limit under the Section. "There are expectations with regards to the increase in the basic tax exemption limit of the current ₹2.5 lakh by 20-30 per cent and tinkering with salary exemption limits for key deductibles to keep the salaried happy and increase their disposable incomes," says Aashish P Somaiyaa, Managing Director & CEO, Motilal Oswal AMC. However, it remains to be seen whether the finance minister will oblige since he has hiked the 80C ceiling from ₹1 lakh to ₹1.5 lakh in his last Budget. Somaiyaa is also expecting sops for affordable housing, or making housing accessible to the middle class is on the cards.
Some fund managers also believe that the fund-sponsored retirement plans would get some extra tax breaks in the budget. "We hope these plans would qualify for some extra breaks. There should be some incentives to investors so that they can plan for a crucial issue like retirement," says Nandkumar Surti, CIO, JP Morgan Mutual Fund. Balasubramanian also believes that these retirement schemes may qualify for an additional tax deduction. "Mutual funds have really done their job of bringing money to the market. And I think the finance ministry has finally realised the importance of mutual funds in pooling in long-term savings. Mutual funds have roughly brought around $10-12 billion into the market, more or less the same amount as foreign investors," he says.
Fans of international funds can also rejoice. According to fund managers, the fund-of-funds category is likely to be classified as equity funds for the purpose of taxation. This is likely to benefit a host of funds, especially international funds. Currently, these funds are taxed like debt funds and that has been a major sore point with investors as well as mutual funds. "We believe that funds of funds with equity exposure of up to 60 per cent would be considered equity funds," says Nandkumar Surti.
Lastly, the bad news. Arbitrage funds are likely to lose their tax advantage in the forthcoming budget as these funds are likely to be classified as debt funds for the purpose of taxation. Arbitrage funds have found favour with conservative investors after the last Budget as the finance minister made some changes in the taxation of returns from debt funds. Currently, arbitrage funds are treated as equity funds for taxation. Investments in them held over a year qualify for long-term capital gains tax, and investors need not pay any tax on investments in these funds held over a year.
"The issue of arbitrage funds was discussed and the finance ministry is said to have taken the decision to put them under the debt category," said a fund manager familiar with the development. The ministry is said to have taken the view that these funds which look to exploit the arbitrage opportunities in different market segments (for example, cash and future markets) can't be strictly termed equity mutual fund schemes. "It is okay. Now the money will come to genuine equity schemes," he said.
The finance minister in the last Budget had hiked long-term capital gains tax on non-equity investments to 20 per cent from 10 per cent and also increased the lock-in period to qualify for long-term capital gains to three years from one year. This has resulted in many debt mutual fund investors shifting their investments to arbitrage funds for better tax-adjusted returns. In fact, arbitrage funds have attracted inflows worth ₹81,796 crore between July 2014, when the Budget was presented, and December 2014. The category has given around 8.59 per cent returns the last year.
If the proposal is included in the final Budget, it would be another jolt to investors who used to park their surplus cash in debt funds to earn better tax-efficient returns. After the finance minister changed the taxation on debt funds, many investors shifted their money to arbitrage funds. Now, they would be forced to rework their strategy, or learn to live with the fact the tax arbitrage opportunity doesn't exist anymore.
Some fund managers prefer to stick to the big picture. Sadanand Shetty, Vice President and Senior Fund Manager, Taurus Mutual Fund, believes that the Make in India campaign itself is a very large canvas where the government can do a large amount of work that can sustain and drive the capex cycle revival in the country. Aashish P Somaiyaa of Motilal Oswal AMC also expects to see major thrust on Make In India campaign, with multiple references to the theme. "For instance, we could see some announcements for the textile, garment, electronics industries in line with the theme," he says.