Financial Daily from THE HINDU group of publications
Wednesday, Feb 25, 2004
Financial Daily from THE HINDU group of publications Wednesday, Feb 25, 2004 |
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Markets
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Mutual Funds MF bonus offers, a tax planning device Nilanjan Dey
Kolkata , Feb. 24 BARELY five weeks before the closure of the current fiscal, investors in mutual funds have started actively tracking bonus proposals mooted by various schemes with the hope of tapping tax-planning opportunities. Aiding their efforts are income-tax advisors who are trying to identify the best ways possible to reduce the burden on their clients - a search that distributors of mutual funds are fully utilising. This seems evident from the recent increase in the number of bonus announcements by sundry fund houses. MF circles indicate that investors, especially of the HNI (high net worth individuals) variety, are willing to commit fresh resources to such options purely as a quick tax-planning strategy. The reason is simple: Bonus issues are a relatively smart method of saving taxes, scoring in some ways over other mechanisms. Cholamandalam MF's proposal for a bonus in its equity fund (institutional plan) in the ratio of five units for every five units is one such case, it is felt. The smart investor would need to sell the original units immediately after the issue. However, bonus units received by him should be retained up to March 31, 2004 and may be disposed of later. If these units were held for a one-year period and more, the gain arising out of this would be treated as long-term capital gains and be taxed at the appropriate rate - 10 per cent plus surcharge. The Kolkata-based distributor Suvridhi Capital Market points out that a bonus issue is different from a dividend proposal from an investor's point of view. In the case of a dividend, investments have to be held for three months in order to claim the benefit of short-term loss. Original units received under a bonus option may be sold the day after receiving the bonus, and the short-term loss generated out of the same may be used to set-off any short- or long-term gain. According to the proposal designed by Chola, there will be no entry loads for investments over Rs 25 lakh. Entry loads will vary for smaller amounts - 2 per cent for amounts up to Rs 10 lakh and 1 per cent for amounts in the Rs 10 lakh-Rs 25 lakh range. No exit load will be charged. An illustration by Suvridhi suggests that an investment of Rs 25 lakh on March 5 (the record date) will result in a loss of Rs 12,49,000 and the amount redeemed on the next day, March 6, will roughly be Rs 12,51,000. Some sections also feel that the units remaining with investors should provide relatively stable returns over the medium term, depending on the state of the markets. It is further noted that the cost of acquisition of the bonus units under Section 55(2) of the I-T Act would be treated as nil. The sale proceeds of these units, therefore, would be treated as gain.
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