The government on Thursday proposed raising long-term capital gains tax on debt-oriented mutual funds to 20% from 10% jolting the mutual fund industry.
In what could be another blow to the industry, the definition of long-term in case of debt funds has also been changed to 36 months from 12 months, which could make debt funds less attractive, industry players said.
“This (increasing long-term capital gains tax on debt funds) is an issue which the industry will have to take up. Indian mutual funds industry has not grown yet, compared to the developed markets. So such a move was certainly not desirable from a growth perspective,” said YM Deosthalee, chairman of L&T Finance Holdings. The company has interests across infrastructure finance, home loans and mutual funds.
Of the total funds managed by the mutual fund industry in India, majority are debt funds. Finance minister Arun Jaitley’s decision to increase the tax on debt funds closes a lucrative avenue that makes investing in debt mutual funds more attractive.
In the case of debt mutual funds, the capital gains arising on transfer of units held for more than a year is taxed at a concessional rate of 10%, whereas direct investments in banks and other debt instruments attract a higher rate of tax.
“With a view to remove this tax arbitrage, I propose to increase the rate of tax on long term capital gains from 10 per cent to 20 per cent on transfer of units of such (mutual funds other than equity oriented funds) funds,” Jaitley said.
But mutual fund companies feel the move, which will be effective from April 1, 2015, is unfair.
“On the one side you talk of deepening the corporate bond market. The biggest activity in the corporate bond market happens via mutual funds. So raising the tax and changing the definition of long-term to three years from one year is not fair.
Many investors will be vary to keep on holding their investments for three years,” said Sandesh Kirkire, CEO of Kotak Mutual Fund.