Budget 2023: AMFI demands tax uniformity for MFs, DLSS, NPS


Association of Mutual Funds in India (AMFI) has asked for parity in tax treatment for investments in different financial sectors, including mutual funds, and to include FOFs under the definition of mutual funds. The proposal was part of its Union Budget 2023-24 document . The industry body has also requested for various steps to be taken for the betterment of the mutual fund industry and investors and to deepen the equity market via mutual funds.

Here are a few important points made by AMFI in its proposal to the union ministry:
Need for parity in tax treatment in respect of Intra-scheme switching of units under MF schemes: AMFI has proposed that Intra Scheme Switches, i.e. switching of investment within the same mutual fund scheme is not regarded as a “Transfer” under Section 47 of the IT Act, 1961 and the same should be exempt from payment of capital gains tax.
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It is therefore requested that Switching of Units from (a) Regular Plan to Direct Plan or vice-versa; and (b) Growth Option to Dividend Option or vice-versa, within the same scheme of a mutual fund are not regarded as transfer and hence, shall not be charged to capital gains.

Request for uniformity in taxation on listed debt securities and debt mutual funds:
The holding period for long term capital gains for direct investment in listed debt securities and Zero Coupon Bonds (listed or unlisted) and for investment through debt mutual funds should be harmonized and made uniform. This may be done by bringing the two at par in by either –

(i) treating investments in non equity oriented mutual fund schemes which invest 65% or more in listed debt securities as long term, if they are held for more than 12 months;


(ii) increasing the minimum holding period for direct investment in listed debt securities and Zero Coupon Bonds (listed or unlisted) to 36 months to qualify as Long-Term Capital Asset.

Uniform tax treatment on Capital Gains from Mutual Fund investments and ULIPs of Insurance companies:

It is proposed to bring parity in tax treatment in respect of capital gains on withdrawal of investments in ULIPs of Life Insurance companies and redemption of Mutual Funds Units, so as to bring about a level playing field between ULIPs and MF schemes.

Introduction of Debt Linked Savings Scheme (DLSS) to help deepen the Indian Bond Market:

It is proposed to introduce “Debt Linked Savings Scheme” (DLSS) on the lines of Equity Linked Savings Scheme (ELSS) to channelize long-term savings of retail investors into higher credit rated debt instruments with appropriate tax benefits which will help in deepening the Indian Bond Market. At least 80% of the funds collected under DLSS shall be invested in debentures and bonds of companies as permitted under SEBI Mutual Fund Regulations. Pending investment of the funds in the required manner, the funds may be allowed to be deployed in money market instruments and other liquid instruments as permitted under SEBI MF Regulations.

Request for amendment to ELSS Rules and include FOF in equity funds:

It is proposed to amend Rule 3 of Equity Linked Savings Scheme, 2005, deleting the stipulation that investments in ELSS should be multiples of Rs 500 and permit investments of any amount subject to a minimum of Rs 500. AMFI also proposed that the definition of Equity Oriented Funds to be revised to include Fund of Funds (FOF) investing in Index Funds

Taxability of long-term capital gains:
It is requested that the LTCG on listed equity shares or units of equity oriented fund schemes be exempted from Capital Gains tax if the equity shares / Mutual Funds Units are held for at least 3 years by suitable amendments to section 112A.

As per the current provisions, long term capital gains arising from transfer of long-term capital assets in the nature of equity shares or units of equity-oriented fund or units of a business trust are subject to capital gains tax @ 10% . The income tax is applicable/payable on LTCG in excess of Rs 1,00,000 in a financial year.

Reduction of tax/TDS rate for NRIs on STCG from Debt Schemes from 30% to 15%:

It is proposed that the rate of tax/TDS for NRIs on STCG from Debt Schemes (i.e., Other than equity-oriented schemes) be reduced from 30% to 15% at par with tax/TDS rate for Equity Schemes.

Pension-oriented MF schemes with Uniform Tax Treatment as NPS
It is proposed that all SEBI registered Mutual Funds should be allowed to launch pension-oriented MF schemes, namely, ‘Mutual Fund Linked Retirement Scheme’ (MFLRS), with similar tax benefits as applicable to NPS under Sec. 80CCD (1) & 80CCD (1B) of Income Tax Act, 1961. In other words, it is also proposed that the tax treatment for NPS and Retirement/Pension oriented schemes launched by Mutual Funds should be aligned by bringing the latter also under Sec. 80CCD of IT Act, 1961, considering that the characteristics of both are similar.

LTCG on Gold ETFs and FoFs:
To encourage retail investors to invest in gold through mutual fund route rather than buying physical gold, it is proposed that Gold ETFs and Fund of Funds which invest 90% or more in Units of Gold ETFs should be subjected to Long Term Capital Gains tax @ 10% instead of @ 20% with indexation benefit (as may be applicable) OR the holding period to avail Long Term Capital Gains taxation in respect of Units of Gold ETFs be reduced from existing period of 3 years to 1 year.

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