- As per the new budget proposal:
- The tax rate on long-term capital gains has been raised from 10 to 20% on transfer of units of mutual funds.
- The period of holding in respect of such units has been increased from 12 to 36 months.
- So if a person invests in a debt fund and wants to redeem if after a year or two, his returns would be reduced due to more outgo on tax.
- This has raised concerns in the mutual funds industry which believes this may have a cascading effect as a majority of assets under management comes under the debt category.
- The Finance Bill had earlier stated that amendments would be effective from April 1, 2015, but it was clarified that it would apply to income arising out of this source in 2014-15.
- Investors who had invested in debt funds early this year and have paid advance tax would now have to bear an additional burden.
- This would also discourage large corporates, which invest their surplus money in short-term debt funds to earn attractive yields, resulting in a reduced inflow under debt schemes.
- Since it’s a retrospective taxation proposal, investors would shift their investments from mutual funds to other revenues. The proposal is also unfair for investors as they were unaware of their tax liability when they invested.
- Also, since the principal is protected and the interest is assured in banking products, the argument that this was intended to bring parity between banking products and mutual fund investments does not hold good.
- Experts believe that these measures should have been effective from October 1, however if investors hasten to redeem their investments before this date, the fund managers would see more outgo of funds.
- Read at:http://www.thehindu.com/todays-paper/tp-business/a-retrospective-tax-on-mutual-fund-investors/article6207609.ece