Mutual funds industry body Amfi in its Budget proposals has sought a reduction in the threshold limit of equities for a fund to quality as an equity oriented fund, news agency Press Trust of India has reported. Currently, if a mutual fund invests at least 65% of its portfolio in equities, it qualifies as an equity oriented fund for the purpose of taxation. Amfi has sought a reduction in this limit to 50%.
Reducing the threshold limit of equities from 65% to 50% for being regarded as ‘equity-oriented fund’ would encourage more investors with lower risk appetite to invest in such funds, the report, quoting Amfi, said.
Investors in equity mutual funds enjoy a number of income tax benefits. Capital gains from sale of mutual fund units depend on how long the investor has held the fund.
If the holding period is below one year, gains are considered short term and they are taxed at 15%. For holding above one year, gains are considered long term and they are taxed at 10% if capital gains exceed ₹1 lakh in a financial year.
Dividends from equity mutual funds are tax-free in the hands of investors. But the fund house pays a dividend distribution tax (DDT) of 11.65% before paying out dividends to the investors.
Amfi has also sought inclusion of Fund of Funds which invest predominantly in units of equity oriented mutual fund schemes under the definition of equity oriented mutual funds for income tax purpose, according to Press Trust of India.
Currently, fund of funds, which invest in other mutual fund schemes, are taxed in the same way a debt fund is taxed. If the holding period is three years or more, gains are considered as long term and they are taxed at 20% with the indexation benefit. If the holding period is less than three years, gains are considered as short term gains and are taxed as per the investor’s applicable income tax slab.