The mutual fund industry has urged the government to increase the threshold for withholding tax (TDS) on dividend to ₹50,000 per annum from the current level of ₹5,000 per annum.

In a pre-Budget representation, the Association of Mutual Funds in India (AMFI) said the current threshold for TDS on dividend has been causing hardship to retail investors particularly when TDS on banks’ fixed deposit was raised from ₹10,000 to ₹40,000 a couple of years ago.

The current regulations cover tax treatment on consolidation of schemes; however, consolidation of “Options” within the same MF scheme are not covered, leaving ambiguity in taxation in case options were to be consolidated.

Extending the existing tax treatment to consolidation of options within an MF scheme would bring parity and reduce the tax burden on unit-holders, it added.

Capital gains tax

Long-term capital gains (LTCG) of listed equity shares and units of equity-oriented MF schemes are taxed at 10 per cent, if the LTCG exceeded ₹1 lakh in a financial year.

However, the proceeds from ULIPs are exempted from income tax, if the sum assured in a life insurance policy is at least 10 times the annual premium and withdrawn after a lock-in of five years, even though ULIPs are like MFs, but with an added advantage of tax deduction on the premium paid.

With high commissions and incentive structure in the life insurance sector and a lucrative tax arbitrage, there is a potential revenue leakage of LTCG tax of 10.4 per cent on the gains from ULIPs up to a premium of ₹2.5 lakh, which could be significant.

It is proposed to bring parity in tax treatment in respect of capital gains on withdrawal of investments in ULIPs of life insurance companies and redemption of MF units, said AMFI.

The industry has urged the government to remove the restriction on ELSS investment in multiple of ₹500 and permit investments of any amount, subject to a minimum of ₹500.

Debt-linked schemes

AMFI has sought permission to launch Debt Linked Savings Scheme, on the lines of ELSS, to channelise long-term savings of retail investors into highly-rated debt instruments with appropriate tax benefits, which will help in deepening the bond market.

AMFI has suggested that Fund of Funds schemes that invests in equity schemes should be treated as an equity-oriented scheme for long- and short-term capital gains tax instead of non-equity MF schemes.

AMFI has proposed a cap of 15 per cent on surcharge rate on income distribution on units from equity MF schemes for non-corporate assessee on equity shares.

box: Other demands

Mutual Fund Units should be notified as ‘Specified Long-Term Assets’ qualifying for exemption on LTCG under Sec. 54 EC

Lower the minimum holding period for LTCG purposes for Gold & Silver ETFs from 3 years to 1 year, as in the case of listed debt securities

Minimum holding period Debt ETFs units for long-term investment for capital gain tax should be reduced to 12 months at par with listed securities.

Gold ETFs and Fund of Funds should be subjected to Long Term Capital Gains tax at 10 per cent instead of 20 per cent with indexation benefit

Stamp Duty on Gold ETFs and Debt ETFs should be rationalised and levied only once instead of being paid on multiple legs for the same units that are issued

Request to permit Insurance Companies to outsource the Fund Management activities to SEBI Registered MF AMCs

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