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Sarbajeet K. Sen

New Delhi , Aug 21

THE Fund of Funds (FoF) segment of the mutual fund industry could soon get a boost with Ministry of Finance agreeing to permit categorisation of such mother funds into "equity-oriented" and "debt-oriented" funds for taxation purposes.

The Ministry has agreed to amend the tax laws to allow FoFs that have over 50 per cent of their assets invested in equity mutual funds to be treated as "equity-oriented funds".

This would make such funds exempt from payment of the 12.5 per cent dividend distribution tax that is levied on debt-oriented mutual funds.

FoFs are funds that invest their assets in other mutual fund schemes and do not directly dabble in investments in equities or debt instruments.

Under the present tax laws, normal mutual funds that have above 50 per cent of their assets invested in equities are categorised as `equity-oriented funds' with the remaining are termed `debt-oriented'.

Dividends declared by equity-oriented funds are tax-free in the hands of investor. Added to this, there is also no dividend distribution tax applicable on these funds.

As against this, debt-oriented funds only have the benefit of the dividend declared being tax-free in the hands of the investor.

However, the laws do not provide for similar categorisation for FoFs as a result of which all such funds by default come under the debt-oriented category making them liable to payment of dividend distribution tax.

"We have given our no objection to permit Fund of Funds to be treated as `equity-oriented funds' if they have majority of their assets invested in equity mutual funds," a senior official of the capital market division of the Finance Ministry said.

The revenue department would now have to process relevant amendments to the Income-Tax Act to put this into effect.

The mutual funds industry has been demanding a separate debt and equity categorisation of FoFs for tax purposes for the past couple of years.

"This has been our demand during the run up to the past two budgets. This would give a major boost to fund houses that are looking at setting up FoFs that investment more than half of their assets in equity funds," the Chairman, Association of Mutual Funds of India (AMFI), Mr A.P. Kurien, told Business Line.

Setting up of FoF has been a relatively new in India with the first such fund being allowed by the securities market regulator barely a couple of years ago.

During the past few years, fund houses have floated less than a dozen FoFs with aggregate asset under management of Rs 1,000 crore.

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