FM has also proposed to increase the rate of tax on long term capital gains from 10 percent to 20 percent on transfer of units of debt MF schemes.
The maiden Budget of Finance Minister Arun Jaitley will impact Mutual Funds very badly. In an attempt to remove tax arbitrage between bank deposits and Debt Fund schemes (the capital gains arising on transfer of units of debt schemes held for more than a year is taxed at a concessional rate of 10 percent whereas direct investments in banks and other debt instruments attract a higher rate of tax), the Finance Minister has done the unthinkable for the MF Industry. He has proposed to increase the rate of tax on long term capital gains from 10 percent to 20 percent on transfer of units of debt MF schemes. Not only that, he has increased the period of holding in respect of such units from 12 months to 36 months for this purpose.
The Mutual Fund Industry just a month back celebrated achieving an AUM of Rs 10 lakh crore out of which, over Rs 7 lakh crore accounted for debt schemes. The FMPs or Fixed Maturity Plans i.e. schemes used by corporates to park short term funds and earn more than bank deposits constituted Rs 1.6 lakh crore.
This AUM of Rs 1.6 lack crore is at risk. Corporates are unlikely to renew or re-enter fresh FMPs once these FMPs mature. That would mean over the next 12 months, the Mutual Fund industry will see a redemption of over Rs 1.6 lakh crore.
It's not just the FMPs that will be impacted. The debt funds that constitute nearly Rs 5.4 lakh crore in AUM will see a flight to bank deposits since the bank deposits will have similar tax treatment.
The Finance Minister says that this tax incentive was provided with the intent to get the retail investors to invest in debt schemes. But, today majority of the investors are corporate who park their surplus funds in debt schemes earning returns little above short term bank deposit rates.
Jaitley says this practice was being misused and there was a lot of tax leakage to the tune of Rs 500- 700 crore from this practice. The Finance Minister is not willing to re-consider this proposal and that would mean, the industry will lose anywhere between 20-25 percent of the AUM in the next 6 months. Now that's an AUM they wouldn't want to lose given the industry is struggling build-up equity AUMs.
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FM Jaitley Crucifies FMPs, Rs 1.6 lakh cr of AUM at risk
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