Rationalisation of tax treatment on Switching of Investments under Mutual Funds v/s ULIPs of Insurance companies AMFI BUDGET PROPOSALS 2018-19

AMFI-  Association of Mutual Funds in India

BUDGET PROPOSALS FOR FY 2018-19

Rationalisation of tax treatment on Switching of Investments under Mutual Funds v/s ULIPs of Insurance companies

Background

•                    Currently, Intra-Scheme Switch transactions, i.e., switching of investment in Units from Growth Option to Dividend Option (or vice-versa) within the same scheme of a Mutual Fund constitutes a “Transfer” under the current Income Tax regime and is liable to capital gains tax, even though the investment remains within the mutual fund scheme, i.e., the underlying securities/ portfolio remaining unchanged, being common for both Options.

•                    • However, the switches to/from various investment plans of the same Unit Linked Insurance Plan (ULIP) of insurance companies does not constitute transfer and is not subjected to Capital Gains Tax.

Proposal

To have a level playing field and uniformity in taxation of investment in Mutual Funds schemes and ULIPs of Insurance companies, it is proposed that in case of Intra-Scheme Switches (switching of investment within the same scheme of a Mutual Fund) be also not regarded as a “Transfer” under Section 47 of the IT Act, 1961 and be exempt from payment of capital gains tax.

Justification

In its “Long Term Policy for Mutual Funds”, SEBI has emphasised the principle that similar products should get similar tax treatment, and the need to eliminate tax arbitrage that results in launching similar products under supervision of different regulators. Thus, there is need to have uniformity in the tax treatment for “Switch” transaction in respect Insurance products and Mutual Fund Products to have a level playing field

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