Union Budget Expectations 2023-24 by Jimmy Patel , CEO Quantum Mutual Fund

 

What Jimmy Patel of Quantum Mutual Fund Expects from the Union Budget 2023-24

The year 2022 saw buoyant participation from investors despite high uncertainties in the market amid interest rate hikes by central banks and geopolitical tensions. The number of folios across categories rose by 16.3% during the year to 139.8 million as of November 2022. Meanwhile, the monthly contribution to mutual fund schemes via the SIP route reached a record high of Rs 133.06 billion as of November 2022, compared to Rs 113.05 billion at the end of December 2021.

Going ahead, in the year 2023 the markets will continue to face several headwinds due to factors such as potential global recession, the war in Ukraine, elevated inflation levels, etc.

As far as the growth of mutual fund industry is concerned, I expect the government to announce  certain measures that would make mutual funds more investor friendly and take it to the next level of growth.

In this regard, firstly I expect the budget to address the difference in tax treatment between equity mutual funds and ULIPs. At present, Long Term Capital Gains (LTCG) arising out of the sale of equity-oriented mutual funds are taxed @10% if the gains exceed Rs 1 lakh. However, proceeds from ULIPs are exempted from Income Tax if the sum assured in a life insurance policy is at least 10 times the annual premium and withdrawn after a lock-in period of 5 years. Since ULIPs are essentially investment products that, like mutual funds, invest in securities, there should be no difference in tax treatment. This will offer investors better leeway to choose an investment product that fits their financial goals and tax-saving needs.

Another thing I always wanted from the Budget is to revise the definition of equity-oriented mutual fund schemes by including Fund of Funds (FoF) schemes that invest predominantly in units of equity-oriented mutual fund schemes. This will bring FoFs investing in equity-oriented mutual funds on par with equity-oriented mutual funds as they will have equal tax treatment.

In my third recommendation I suggest introduction of Debt Linked Saving Scheme (DLSS) on the lines of Equity Linked Saving Scheme (ELSS). This would help channelise the long-term savings of retail investors into high quality debt instruments with tax benefits, which will help in deepening the Indian Bond Market. Introduction of DLSS will help small investors to participate in bond markets at low costs and at a lower risk as compared to equity markets. This will also bring debt-oriented mutual funds at par with tax-saving Bank Fixed Deposits, that are eligible for tax deduction under Section 80C.

Mutual Funds should also be allowed to launch Mutual Fund Linked Retirement Scheme (MFLRS), which would be eligible for the same tax concessions available to National Pension System (NPS). Notably, investment in NPS is eligible for tax deduction under Section 80CCD (1) & 80CCD (1B) of the Income Tax Act, 1961, with Exempt-Exempt-Exempt (E-E-E) status. A majority of NPS subscribers are from the government and organised sector. Hence, MFLRS could target individuals who are not subscribers to NPS, especially those from the unorganised sector and provide them with an option to save for the long term, coupled with tax benefits.

Furthermore, there should be parity in tax treatment for direct investment in listed debt securities and indirect investment in the same instruments through debt-oriented mutual fund schemes. At present, direct investment in listed debt securities and zero-coupon bonds (listed or unlisted), if held for more than 12 months, is treated as a long-term investment. On the other hand, if the said investment was made through a debt-oriented Mutual Fund scheme, the period of holding increases to 36 months for it to be regarded as a long-term investment. If the long term holding period for debt mutual fund investment is brought down to 12 months, it will make the category attractive to investors by simplifying the long term capital gain tax structure.

Another point is that Intra-scheme switches (i.e. switching of investment within the same scheme of a mutual fund) should be exempt from payment of capital gains tax as no gains are realised in such a case. Therefore, I suggest that amendments must be made so that switching of units from (a) Regular Plan to Direct Plan or vice-versa; and (b) Growth Option to Dividend Option or vice-versa, within the same scheme of a mutual fund are not regarded as ‘transfer’ and hence, shall not be charged to capital gains.

Last but not the least, I suggest that mutual fund schemes that invest in ‘specified infrastructure sub-sector’, as notified by the Government of India, should be included in the list of specified long-term assets under Section 54EC. Such equity and debt schemes will have a lock-in period of three years and will be elegible for exemption on long-term capital gains. The tax benefit under Section 54EC will help channelize the gains from sale of immovable property into capital markets through mutual fund route.

I personally feel that if the Budget incorporates these suggesstion, it will bring mutual funds on par with comparable investment avenues and thereby boost inflows in equity and debt schemes. This in turn can prove to be rewarding for investors.