Finance Ministry may tweak Budget 2014 proposal to double tax on debt mutual funds

NEW DELHI: Finance Ministry is contemplating to tweak the Budget proposal for hiking capital gains tax to 20 per cent for debt mutual fund investors from prospective effect instead of April 1, 2014.

"There have been demands from mutual fund industry body and some announcement could be made at the time of reply of Finance Minister on Finance Bill debate in Parliament later in the month," an official source said.

The mutual fund industry has been arguing that those persons who had invested money in debt-oriented MFs prior to the announcement of Budget proposals should not be subjected to higher incidence of tax.

Finance Ministry, according to sources, could extend lower tax rate of 10 per cent to those investors who had redeemed their holding on or before July 10.

Also the tax department is considering to exempt past investments whose redemptions would be made by March 2015.

"A final call will be taken after weighing the pros and cons," an official said.

Finance Minister Arun Jaitley in his budget proposals on July 10 had said that long-term capital gains tax on debt-MFs will go up to 20 per cent from 10 per cent. The move is part of government's effort to bring parity with banks and other debt instruments.

Besides the holding period for these units to be eligible for long-term capital gains has been hiked to 36 months from 12 months.

Industry body AMFI has said new budget rules should apply to close-ended debt schemes as against all non equity MF schemes as proposed.

Jaitley had said that in the case of debt MFs, the capital gains arising on transfer of units held for more than a year is taxed at a concessional rate of 10 per cent whereas direct investments in banks and other debt instruments attract a higher rate of tax. This allows tax arbitrage opportunity.
This arbitrage has hardly benefited retail investors as their percentage is very small among such MF investors, he said.

"With a view to remove this tax arbitrage, I propose to increase the rate of tax on long term capital gains from 10 per cent to 20 per cent on transfer of units of such ( mutual funds other than equity oriented funds) funds," Jaitley had said in his budget speech.