The Hindu Business Line : Equity fund redefined

Close-end equity oriented funds have been given a level playing field with open-end funds on the provisions relating to dividend distribution tax, securities transaction tax and long-term capital gains tax. Dividends from close-end equity oriented funds will now be tax-free; earlier they were subject to a dividend distribution tax at 12.5 per cent.

Investments in close-end equity funds will now be subject to securities transaction tax. Capital gains made on these funds, if units are held over a year, will be exempt from capital gains tax, just as is the case with open-end equity funds. This may bring tax relief to investors in the newly launched close end funds such as HDFC Long Term Equity, Franklin Smaller Companies Fund and PruICICI Fusion Fund.

The definition of equity-oriented funds has been tweaked to exclude hybrid funds with a conservative equity exposure from its purview. Only funds with 65 per cent of their corpus invested in equities will now be recognized as equity-oriented funds, against the requirement of just 50 per cent now. This means that balanced funds that invest less than 65 per cent of their assets in equities will not reap the benefits of concessional short-term capital gains tax or exemption from long-term capital gains tax.

May rejig portfolio

Balanced funds such as HDFC Prudence, FT India Balanced Fund, Kotak Balance will have to retain their equity exposure above 65 per cent to retain the tax benefits. Investors in conservative balanced funds, with less than a 50 per cent equity exposure, will have to pay short-term capital gains tax at the marginal rate, and long-term capital gains tax at 10 per cent. But fund houses may amend their fund structure to allocate more to equities.

All these proposals are effective from June 1, 2006.