AMFI BUDGET PROPOSALS 2018-19 Alignment of Tax Treatment for Retirement / Pension Schemes of Mutual Funds and National Pension System.

AMFI-  Association of Mutual Funds in India

BUDGET PROPOSALS FOR FY 2018-19

Alignment of Tax Treatment for Retirement / Pension Schemes of Mutual Funds and National Pension System.

Background

In 1996, Sections 54EA and 54EB were introduced under the Income Tax Act, 1961 with a view to channelize investment into priority sectors of the economy and to give impetus to the capital markets.

Under the provisions of Sec. 54EA and 54EB, capital gains arising from the transfer of a long-term capital asset on or after 01-10- 1996, were exempted from capital gains tax if the amount of net consideration (Section 54EA) or the amount of capital gain (Section 54EB) was invested in certain specified assets, including mutual fund units, redeemable after a period of three years. (cf: Notification No. 10248 [F. No. 142/58/96-TPL], dated 19-12-1996).

However, the aforesaid exemption under Sec. 54EA and 54EB was withdrawn in the Union Budget 2000-01 and a new Section 54EC was introduced, whereby tax exemption on long-term capital gains is now available only if the gains are invested in specified long-term assets (currently in bonds issued by the NHAI & REC) that are redeemable after three years.

Under Sec. 54, long term capital gains arising to an individual or HUF from the sale of a residential property are exempt from capital gains tax, if the gains are invested in a new residential property either bought within two years or constructed within three years from date of transfer of existing property. In case of buying a new property, the exemption is available even if it is bought within one year before the date of transfer.

Proposal

It is proposed that, mutual fund units that are redeemable after three years, wherein the underlying investments are made into equity or debt of ‘infrastructure sub-sector’ as specified by RBI Master Circular in line with ‘Master List of Infrastructure sub-sectors’ notified by the Government of India, be also included in the list of the specified long-term assets under Sec. 54EC.

While the underlying investment will be made in securities in infrastructure sub-sector as specified above, the mutual fund itself could be equity oriented scheme or debt oriented scheme, based on investors’ choice and risk appetite. The investment shall have a lock in period of three years to be eligible for exemption under Sec. 54EC.

Justification

Recognizing the need to channelize long term household savings into the Capital Market, the Government has been taking various measures to encourage individual tax payers to invest in capital markets via mutual funds, through tax incentives u/Sec. 88 / 80C / 54EA / 54EB etc. However, consequent on withdrawal of the benefit of capital gains tax exemption under Section 54EA and 54EB, the inflow of investments, which could have otherwise flowed into capital market, has altogether stopped and hence there is a need to re-introduce capital gains tax exemption for investment in mutual fund units, so as to incentivize investment in capital markets.

With the ever growing demand for residential property and easy access to home loans with tax incentives on home loan repayments, the boom in real estate sector has been a continuing phenomenon. Housing being a basic need, a residential property ranks high & ‘a must have’ or ‘desirable’ asset when compared to various other assets and is rightly preferred over other assets.

Most individuals liquidate their financial assets to purchase a residential property with or without the aid of home loans. 

Money once invested in immovable property using the sale proceeds from mutual funds or stocks never comes back into capital markets, as people invariably reinvest the capital gains arising from sale of an immovable property to buy another property & avail of capital gains tax exemption u/Sec. 54 or 54F. 

Thus, the flight of money from financial markets capital into real estate sectors has become an irreversible phenomenon.

Thus, in order to reverse this one-way phenomenon and to channelize at least some of the gains from sale of immovable property into capital markets, it is expedient to broaden the list of the specified long-term assets under Sec. 54 EC by including mutual fund units under both equity oriented or non-equity schemes (based on investors’ choice and risk appetite) - with a lock in period of three years.

Share: