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Business News/ Industry / Banking/  No retrospective tax on debt funds, says Arun Jaitley
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No retrospective tax on debt funds, says Arun Jaitley

Debt funds between 1 April and 10 July will attract long-term capital gains of 10% if they are held for more than a year

In his maiden budget, Jaitley had proposed a tax on gains from investments in non-equity mutual fund schemes. Photo: Pradeep Gaur/MintPremium
In his maiden budget, Jaitley had proposed a tax on gains from investments in non-equity mutual fund schemes. Photo: Pradeep Gaur/Mint

It’s final. Withdrawals from debt funds between 1 April and 10 July will attract the old taxation rules of long-term capital gains of 10% (without indexation) or 20% (with indexation) if they are held for more than a year. Similarly, the old threshold for claiming the long-term capital gains tax for debt funds if held for a year will apply. They would be taxed at income tax rates if they are held for a period of less than a year. The new Budget 2014 rules on debt funds will apply to all redemptions made after 10 July.

Finance minister Arun Jaitley announced in Parliament on Friday during the debate on the Finance Bill that the higher long-term capital tax of 20% that he announced in the budget on 10 July will be applicable on all debt funds redeemed after 10 July.

Investments made in this period or even before will be subject to the provisions of the budget.

Budget 2014 raised long-term capital tax on all debt funds to 20%. Earlier, withdrawal from debt funds attracted a long-term capital gains tax of either 10% (without indexation) or 20% (with indexation).

Additionally, it also increased the threshold to claim long-term capital gains tax on debt fund investments to three years, from a year earlier. Jaitley did not touch equity funds’ taxation rules in his first budget.

This partial roll-back falls short of what the Indian mutual funds (MF) industry had demanded.

The Association of Mutual Funds of India (Amfi), the industry’s trade body, urged the capital market regulator, the Securities and Exchange Board of India (Sebi), and the ministry of finance to reconsider the debt fund provisions Jaitley announced.

Primarily, Amfi asked that open-ended debt funds be spared from the new Budget provisions. It also wanted the new provisions to be applicable only to close-ended schemes.

Jaitley’s clarification on Friday implies that investors who had invested before—or just before—the previous fiscal year (2013-14) ended in the hope of getting double indexation benefits would be taxed at the higher rate (20%) if their funds come up for redemption before they complete three years.

“The roll-back is, obviously, not as per what we had expected. Now most fund houses will have no choice but to roll over the one-year FMPs (fixed-maturity plans) that are maturing these days or in the future to ensure that investors get to stay in them for three years so that investors don’t have to pay short-term capital gains tax," said the chief executive officer of a mid-sized fund house. He did not want to be named because he said he still has to take his board’s approval for allowing a roll-over of FMPs.

Last week, Mint reported that fund houses have now started to roll over the one-year FMPs that are currently coming up for maturity. Upon maturity, these FMPs give the option to their investors to stay invested till such time that they complete three years. Additionally, fund houses have already started to launch three-year FMPs. Fund houses such as L&T Investment Management Ltd and ICICI Prudential Asset Management Co. Ltd have started to launch three-year FMPs.

The finance minister also said the government will move amendments to the Constitution Amendment Bill in order to implement the goods and services tax in the current fiscal itself.

He also moved amendments to continue with the accelerated depreciation benefits for wind energy, as promised last week.

Remya Nair and Elizabeth Roche contributed to this story.

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Published: 25 Jul 2014, 01:31 PM IST
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