MF Body Suggests Tax Sops for Debt Schemes

MF Body Suggests Tax Sops for Debt Schemes

Experts say there is need for tax parity between ELSS and other 80C products such as insurance NPS.

The mutual fund sector wants the government to allow all investments of three years or more in schemes to qualify for deduction under section 80C. It also wants all equity schemes that invest 80 per cent of their corpus in equities to provide an option that will make them qualify for sops under the section.

These suggestions are part of the Budget proposals drawn up by the sector’s lobbying arm Association of in India, or Amfi, and will be sent later this month to the finance ministry.  At present, only investments in equity linked savings schemes, or ELSS, qualify for an 80C deduction.

 is a separate category of open-ended, diversified equity schemes that come with a mandatory three-year lock-in. Besides ELSS, investments up to Rs 1,50,000 in Public Provident Fund, certain 5-year bank fixed deposits, life insurance premiums, etc are eligible for deduction under section 80C.

“Even schemes come with their share of risks, whether it is credit or interest rate risk, and to that extent anyone committing capital to schemes for three years should be able to get a break,” said CVR Rajendran, CEO, Amfi.

According to experts, there is a need for parity between and other 80C products like insurance and NPS. “Investors in unit linked insurance plans and NPS can switch between  and equity without losing out on the benefit. That option is not available with mutual fund investors currently,” said Manoj Nagpal, CEO, Outlook Asia Capital.

According to Nagpal, providing an option for existing equity schemes will help investors put their money in the best performing schemes rather than just limit themselves to schemes. Here’s how it will work. The equity schemes will provide a box with an option. If you tick on this option, the investments will be locked-in for three years and qualify for an 80C deduction.

Experts say that the move could also mean existing schemes become redundant over a period of time. There are 40-odd schemes in the market currently with total assets of about Rs 50,000 crore, as per Value Research. In contrast, the total number of open-ended equity schemes number about 400.

Amfi is also lobbying for a reduction in the current three-year tenure of schemes that make them qualify for long-term capital gains (LTCG).  In 2014, the minimum tenure for applying LTCG to schemes was raised to three years from one year.

As per current norms, if units of a scheme are redeemed within three years, the gains are added to the one’s income and taxed as per the applicable income slab. If the holding period is three years or more, the gains are taxed at 20 per cent after indexation.

“The bond market is set to grow in India, and there needs to be parity between direct in bonds and that through mutual funds,” said Rajendran.

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