Finance Minister Arun Jaitley’s proposal to revoke the tax benefits enjoyed by debt funds & FMPs has come as rude shock to investors. GEPL has explained the entire position and given valuable guidance on what investors should do now
* Product like Liquid, Ultra short funds are more suited with better pre tax return over short term bank fixed deposits. Hence we suggest investors to hold the Liquid and ultra short term as they are more tax efficient
* FMP (Fixed Maturity Plan) will be not in favor now as they are pre tax not equivalent to Bank FD.
* Short Term Debt fund: Investors who wants to invest into short term debt funds should consider accrual scheme as they will be less volatile in nature and as against Bank Fixed Deposits.
My first question – the fine print – I read somewhere that the change is effective 1st April 2015 but for assessment year 15-16, which is essentially this financial year 14-15. Is this true? If yes, all those who invested (yours sincerely, in a big way) in FMPs are going to pay a very big price for this. I am going to loose out big time.
2nd Question – I also read in VR that the industry is gong to represent this to FM and suggest that only FMP alone be taxed and not open ended Debt fund. My question is, Why should FMP be alone brought under this draconian law as suggested? That is a shocker. If anything, it should be the other way around. I don’t have a choice in exit in FMP, whereas in open end debt funds, you have a choice to stay on 3 years, if you want to avail the LT tax. I can understand that you can tax for new FMPs invested from today but why chop the hands of someone, who believed in the law before ? Is it not against the very principle of RETROSPECTIVE TAXATION, which was a poll platform and big promise of BJP?
Govt clears confusion on date of debt MF tax hike
Rules applicable from April 1, 2014; investors who have already redeemed will also have to pay tax
The effective date of the increase in long-term capital gains tax on debt mutual funds is April 1, 2014, with Revenue Secretary Shaktikanta Das on Friday putting a lid on the confusion over the issue.
The new tax rate “would apply to income arising out of this source in 2014-15, for which the assessment year would be 2015-16,” Das told Business Standard, adding that if somebody has already paid advance tax, the Central Board of Direct Taxes would issue a circular to clarify the tax change separately once the Finance Bill is passed.
The confusion arose as the Finance Bill 2014-15 stated that these amendments (doubling the tax rate to 20 per cent) will take effect from April 1, 2015 for the assessment year 2015-16 and subsequent years.
Tax experts earlier said if the new tax was applicable from April 2015, then the assessment year should have been 2016-17. But the revenue secretary’s clarification means that any investments already made in the current financial year would also be impacted by the change.
Investors, who have already redeemed their units, will now have to pay additional tax. With the Budget prescribing a flat 20 per cent tax rate on redemption, investors who had taken the advantage of 10 per cent without indexation benefit will have to cough up the additional amount.
“If you invest in bank deposits, you have to pay tax depending on your income-tax slab. Most of the people, who invest in debt MFs, are in the 30 per cent bracket. This was giving a lot of arbitrage, mainly to corporations and high net-worth individuals. But the whole scheme of having a lower tax rate was that mutual funds would have retail investors as primary beneficiaries. However, the percentage of retail investors in debt funds is miniscule. Also, a lot of money which should go into the banking system was coming to mutual funds,” Das explained.
Typically, a lot of investors redeem their 13-14 month fixed maturity plans in April-May to take advantage of the double indexation benefit. That is, an investor gets the inflation indexation benefit of two years by investing for just over a year. According to experts, around 150 schemes were redeemed in April-May 2014. All these investors may have to pay additional tax.
“This would be like a retrospective tax on investors because even after redeeming their units, they would have to pay additional tax,” said a tax expert.
The increased tenure from one year to three years is another shocker for the Rs 10-lakh crore mutual fund industry, whose debt offerings have been favoured by investors over traditional bank fixed deposits.
Industry players don’t rule out large redemptions in debt schemes if the new norms are applicable to existing schemes. Bond yields have already started hardening, fearing redemptions.
The yield on the 10-year benchmark government bond rose to a high of 8.84 per cent during intra-day trades on Friday, a level last seen on May 20.
It finally ended stable, almost unchanged over the previous day at 8.77 per cent.
“The money being invested with a time frame of 1-3 years will be impacted with some redemptions seen from open-ended funds before this new tax rule comes into effect,” said Niranjan Risbood, director (fund research) at Morningstar India.
Among debt schemes, fixed-maturity plans (FMPs), typically preferred by investors for short-term investments, would be the worst-hit, said industry experts. Currently, the assets under FMPs are at an all-time high level of Rs 1.74 lakh crore. Around 75 per cent of assets in the FMP category have a one-year investment horizon.
http://www.business-standard.com/article/economy-policy/govt-clears-confusion-on-date-of-debt-mf-tax-hike-114071200163_1.html
I went through several forums and posts. I feel that somehow the FMP investment is considered as HNI /eltist/ corporate and the popular opinion is to put them under the bus in some shape or form . This is just a killer blow for a regular, retail investor like me, who believed in the prevailing tax laws. The very proposal is retro and retro in thinking – something which BJP said all along is a UPA legacy. I am missing Chidu for once….