The mutual fund industry has urged the government to allow launch of debt linked saving scheme and lift the restrictions on equity linked saving schemes investment.

In its pre-Budget representation, the industry body Association of Mutual Funds(AMFI) in India said the bond market has remained small and shallow and the responsibility of providing debt capital has largely rested with the banking sector which is in no position to expand their lending portfolios till they sort out the existing bad loans problem, especially post Covid pandemic.

AMFI has proposed to introduce Debt Linked Savings Scheme on the lines of Equity Linked Savings Scheme to channelise long-term savings of retail investors into higher credit rated debt instruments with appropriate tax benefits which will help in deepening the bond market.

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It further proposed that the investments up to ₹1.50 lakh under DLSS be made eligible for tax benefit under a separate sub-section and subject to a lock-in period of 5 years.

The amount to be invested in ELSS are in multiples of ₹500, with a minimum of ₹500. The rule was introduced to facilitate acceptance of subscriptions in cash. Currently, mutual fund transactions are in electronic mode or cheques. Hence, the requirement of multiples of ₹500 has lost its relevance and investment in multiples of ₹1 should be allowed, it said.

Permission to launch pension plan with the same treatment as NPS

The mutual fund body has also sought permission to launch pension plan with the same treatment as National Pension Scheme. While NPS is eligible for tax exemptions under Section 80CCD, mutual fund schemes which are similar in nature, qualify for tax benefit under Section 80C. All mutual funds should be allowed to launch pension plans, it said.

The minimum holding period in respect of listed securities for being considered as long term investment for capital gain tax purposes is 12 months, whereas for Debt-oriented Mutual Fund scheme including ETFs, it is 36 months. The minimum holding period for units of Debt ETFs for being considered as long-term investment for capital gain tax purposes be pegged at 12 months at par with listed securities.

Gold ETF and Gold Linked MF Schemes are treated as “Other than Equity Oriented Funds” for income tax purposes. Consequently, the minimum period of holding for long-term investment for capital gain tax purposes with respect to units of Gold ETF is 3 years attracting LTCG tax at 20 per cent with indexation, while the Short Term Capital Gains is taxed at the marginal rate of taxation applicable to the assessee.

The launch of Sovereign Gold Bonds has made Gold ETF and Gold Linked MF Schemes less attractive resulting in lack of interest. In terms of liquidity, Gold ETFs are superior as compared to SGB, as Gold ETFs provide continuous liquidity to investors. Lowering the holding period of Gold ETFs for LTCG purposes from 3 years to 1 year will help expand retail investments in ETFs and move gold demand from physical market to financial savings.

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