The Hindu Business Line : Tax modifications spell positive for MFs

THE mutual fund industry expects positive inflows post Finance Minister's announcement, which included equity funds under the definition of "securities," and, thereby extending the capital gains tax benefit to investment in these funds as well.

The disparity between mutual fund investments and direct transactions on the exchanges has now been removed.

"The FM has built on the pragmatic and growth-oriented approach of the Union Budget in the modifications announced today.

"The differential turnover tax rates to various classes of investors, the exemption of debt transactions and the extension of capital gains exemptions to equity mutual funds will have a very positive impact on market sentiments.

We expect long-term, stable and retail inflows into both mutual funds and the broader capital markets," said Mr Ajay Bagga, Chief Executive Officer, Kotak Mahindra Mutual Fund.

There is an incidence of double impact of transaction tax on equity funds as fund houses would be paying 0.15 per cent on transactions of the underlying securities and the levy of 0.15 per cent on redemption of units that the investors will bear.

Industry players are confident that this "double impact" will not be a major dampener.

"We believe that the advantages offered by equity funds would not be affected by transaction tax. Even though transaction tax would be levied on the underlying securities as well as units of mutual funds, the economic advantages offered by equity funds would continue to be good," said Mr Rajat Jain, Chief Investment Officer, Principal PNB Asset Management.

Transaction tax would not be applicable on debt funds and the levy on underlying debt instruments has also been withdrawn. This is in line with the recommendations made by the Association of Mutual Funds in India to the Finance Minister.