The Hindu Business Line : MFs devise bonus options for tax-planners

THIS could be an open season for investors in bonus plans of mutual funds, as a number of fund houses are gearing up for bonus issues. ING Mutual Fund is leading the pack with a plan for investors in ING Income Portfolio.

With the need for tax planning for the year getting stronger by the day, all the more driven by gains recorded on stock exchanges, the market for mutual funds looks set to play host to bonus issues, say experts.

The bullish equity market has brought in its wake considerable tax-related concerns, especially so for investors who have raked in large profits. After having made money (read: both short- and long-term capital gains) the investment fraternity must now seek out the right tax-planning methods.

A number of fund houses, aware of the development and based on the feedback they have received from clients, are trying to devise bonus options for them, investment circles suggest.

This has been done in the past, and there is no reason why the proposal will not be revisited this time, it is pointed out.

Ms Kavita Hurry, Managing Director & Chief Executive Officer, ING MF, confirmed that there would be a bonus soon for investors in the income scheme, the record date for which is coming up soon. Distributors feel that a section of investors will accept this and the similar offers that are likely to follow.

Mr Bhanu Prakash Agarwal, a chartered accountant who advises investors in mutual funds, provides an example of how bonus propositions can be leveraged.

He considers an income fund (say with an NAV of Rs 20) that proposes a 2:1 bonus issue. The NAV, after the bonus is declared on the relevant record date, declines proportionately and stands at Rs 13.33.

"An investor may now book short-term losses by selling the original units — mind you, not the bonus units — at Rs 13.33. The loss, therefore, is Rs 6.67. According to the IT Act, the cost of acquisition of the original units does not change even after the bonus issue. The short-term loss arising out of the sale may always be adjusted against short-term or long-term gains," he said.

It is also pointed out that Section 55(2) of the IT Act mentions that the cost of acquisition of the bonus units may be treated as nil. And as and when unit holders sell such holdings, the entire sale proceeds may be considered as capital gain. Investors, therefore, may plan their strategy, by either selling the units immediately after the year ending or postpone the capital gain to the next year.

Experts, in fact, indicate that there is merit in selling bonus units after one year and booking long-term capital gain in the process. Tax is accordingly paid at a lower rate of 10 per cent.

"We are well into the financial year and March 31 will come before we know it. Bonus units may actually turn out to be the flavour of the tax-planning season", Mr Agarwal said, adding that a section of the fund houses may well look at this as an opportunity of sorts. Some distributors too endorsed this.

Mr Sandeep Garodia, who handles MF distribution at Suvridhi Capital Markets, is of the view that funds will be generally willing to devise investor-friendly products. "They have done this in the past and may consider this latent demand as a positive development", he noted.

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