Mutual fund industry expects tax reforms for greater financial inclusion in budget

Budget expectations: In the wake of significant structural reforms implemented by the Modi-led NDA government in the last two terms, India's economy has been recognised as the fastest-growing among the seven largest Emerging Market and Developing Economies (EMDEs) by the World Bank. The International Monetary Fund (IMF) has termed India a "bright spot," attributing this success to government reforms and the Reserve Bank of India's prudent monetary policies.

The mutual fund industry witnessed remarkable growth, with individual investors holding a substantial 59.2 per cent share of assets as of November 2023. The Assets Under Management (AUM)-to-GDP ratio, a measure of mutual fund penetration in the economy, has surged to 15 per cent, compared to 7-8 per cent a decade ago. Despite this progress, there is a call for additional measures to make mutual fund investments more tax-efficient and enhance financial inclusion.

One crucial proposal revolves around aligning the tax treatment of equity mutual funds with Unit Linked Insurance Plans (ULIP). Currently, ULIPs enjoy tax exemptions on returns if the annual premium is below Rs 2.5 lakh, whereas equity mutual funds face different tax implications. Advocates for tax parity argue that both ULIPs and equity mutual funds are investment products with risk coverage and should be treated equally, said Jimmy Patel, MD & CEO, Quantum AMC.

The industry is also urging the government to revise the definition of equity-oriented mutual fund schemes, including Equity Fund of Fund (FoF) schemes for equitable taxation. Currently, equity FoFs are treated as debt-oriented for tax purposes, creating discrepancies that could be rectified through regulatory adjustments.

Further suggestions include exempting capital gains tax on intra-scheme switches within the same mutual fund scheme and introducing a Debt Linked Saving Scheme (DLSS) akin to the Equity Linked Saving Scheme (ELSS). The DLSS aims to attract retail investors to the Indian bond market, especially following the inclusion of Indian bonds in global indices, Patel said.

In a bid to promote long-term savings, the proposal calls for a Mutual Fund Linked Retirement Scheme (MFLRS) with tax incentives similar to the National Pension System (NPS). This would provide an alternative for individuals in the unorganised sector to save for retirement, contributing to greater financial inclusion, Quantum AMC said.

While recognising the interim nature of the upcoming budget before the Lok Sabha elections in 2024, industry experts remain optimistic that these proposed reforms, if implemented, could signify a significant win-win for both investors and the mutual fund industry, fostering deeper financial inclusion and market growth, Patel added.