Mutual funds have sold as much as Rs4,500 crore of debt in two days leading to higher bond yields. Are mutual fund investors redeeming their debt mutual fund investments due to the new tax norms?
Last year, we saw bond yields rise as foreign investors started heavily selling Indian debt. This year after the budget announcement, mutual funds have sold as much as Rs4,500 crore of debt in two days. This has been the highest amount sold on two consecutive days since 31 July 2013. On 10 July 2014, the Union Budget 2014-15 announced, higher long-term capital gain (LTCG) tax for non-equity mutual funds. On the day of the budget mutual funds sold Rs1,183.50 crore of debt and on the next day as much as Rs3,351.30 crore of debt securities were sold, according to data released by the Securities and Exchange Board of India. Foreign investors on the other hand were net buyers of around Rs988.24 crore of Indian debt over the same period. The benchmark 10-year government bond yield rose by four basis points to 8.77% on 11 July 2014 from 8.73% on 9 July 2014. Was this due to heavy redemptions from debt mutual funds on account of the LTCG tax amendments?
Finance minister Arun Jaitley, in his maiden budget, announced that tax on debt mutual funds will be increased to 20% (from 10% earlier), as well as the holding period for classification as long term would be extended to 36 months from the earlier 12 months. This was an attempt to bring parity between different instruments.
Reports mention that the tax impact could result in huge outflows from debt mutual funds. The Association of Mutual Funds in India has written to the regulator and the finance ministry to ensure that none of the tax proposals are brought in force with retrospective effect which could lead to heavy redemptions. The FM has yesterday announced that he may consider imposing this next year instead of this year itself.
Commenting on the impact of this regulation, Mr Balasubramanian, CEO, Birla Sun Life Mutual Fund said, “I would assume that FMPs as an asset class would lose attraction for short term and will come largely on the longer term. So, anyone with money for this category would need to come in for three years.” Further, he mentioned that, “The increase in long-term capital gain tax for debt funds would encourage investors to come in longer term saving.”
Much of the mutual fund redemptions could be from corporate investors. Murthy Nagarajan, head- fixed income, Quantum AMC, mention that, “These norms are aimed at the corporate investors who used to invest for one year and avail of tax benefits by investing in a fixed maturity plan. The same corporate investors if they invest in bank deposits will pay at the highest marginal tax rates. The retail investors participation has been nominal in one year FMP’s. The idea is to pluck this tax arbitrage for corporates. Going forward, the FMP money maturity may be invested in liquid funds or in bank fixed deposits.”
Clarifications required
Another issue with this regulation is its applicability. There has been no clear instruction on when would this tax norm be effective and would investors have to pay long term capital gains tax of 20% if they have redeemed their investment during the period between April 1, when the revised rate is proposed to take effect, and July 10, the date of its announcement. A clarification is said to be issued.
Similarly, the budget highlights mentions a line about ‘Uniform tax treatment for pension fund and mutual fund linked retirement plans’, however, the budget speech, and neither the finance bill mentions anything about taxation for mutual fund linked retirement plans.
Again the applicability of Section 80 CCD for private sector employees investing in a pension fund has been a much discussed issue. Industry experts have different views of the same. Some are saying the section was reworded to bring clarity and thus would have no implication for private sector employees who have claimed deduction under this section. Others have the view that, private sector employees, employed on or before 1 January 2004 would have wrongly claimed a tax deduction under this section.
Inside story of the National Stock Exchange’s amazing success, leading to hubris, regulatory capture and algo scam
Fiercely independent and pro-consumer information on personal finance.
1-year online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
30-day online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
Complete access to Moneylife archives since inception ( till the date of your subscription )