AMFI BUDGET PROPOSALS 2018-19 Definition of Equity Oriented Funds to be expanded to include investment by Fund of Funds Schemes in EOF

 AMFI  BUDGET PROPOSALS 2018-19

Definition of Equity Oriented Funds to be expanded to include investment by Fund of Funds Schemes in EOF

AMFI -  Association of Mutual Funds in India

BUDGET PROPOSALS FOR FY 2018-19

  

Definition of Equity Oriented Funds (EOF) to be expanded to include investment by Fund of Funds Schemes in EOF

Background

•  A Fund of Funds (FOF) scheme of a Mutual Fund primarily invests in the units of another Mutual Fund scheme.

• An FOF investing in Equity Oriented Funds (EOF) takes exposure to listed equity securities through the EOF in which it invests.

• At present, where a FOF invests predominantly in units of an Equity Oriented Funds (EOF), the FOF is NOT treated as an EOF because under current Income Tax regime, definition of an EOF only specifies investment in listed equity securities of domestic companies.

 • Consequently, in case of FOFs investing in equity securities of domestic companies via EOFs, there is dual levy of Dividend Distribution Tax (DDT), viz., when the domestic companies distribute dividends to their shareholders and again, when the FOF distributes the dividends to its unit-holders.

Proposal

•  It is proposed that the definition of “Equity Oriented Funds” (EOF), be revised to include investment in Fund of Funds (FOF) schemes which invest predominantly i.e., 65% or more, in units of Equity Oriented Mutual Fund Schemes.

• Consequently -  a) the income distributed by such funds be exempted from ‘tax on distributed income’ under section 115R of the Act; and

b) redemption of units in FOF schemes investing predominantly i.e., 65% or more in EOF be subjected to the same capital gains tax, as applicable to sale of listed equity securities / units of Equity Oriented Mutual Fund Schemes.

Justification

•  There is strong case for rationalisation of taxation between Direct Equity, EOF and Equity Oriented Fund of Funds.

• Hence the Tax treatment in respect of FOF schemes investing in predominantly in EOFs should be at par with EOFs. Accordingly, FOFs investing 65% or more of their corpus in EOF should be regarded as EOFs.

• To ensure that the intent of the law is not sacrificed, the minimum allocation of an FOF to its target fund(s) investing in the dominant asset class may be set at a higher level, say 90% for such eligibility. In the absence of such higher allocation, an FoF investing more than 65% in funds that invest at least 65% in equities may attract equity taxation while theoretically investing merely 42.25% in equities.

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