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Mutual funds and Budget 2016: 5 things you should know

Tough regulatory reforms and a sharp decline in the stock market made 2015–16 a tough year for mutual funds. The industry was looking at yesterday’s budget for announcements that would revive investor interest. Here are five key points from Budget 2016 that affect the mutual fund sector.

Capital gains tax:

Investors who switch plans within the same mutual fund scheme pay capital gains tax. This has led to widespread debate in the mutual fund sector. Such taxation hinders investor flexibility and makes them wary of investing in mutual funds. The finance minister abolished the capital gains tax on the merger and consolidation of mutual fund plans, yesterday. This is a welcome move for the sector. The legislation will come into force in FY2017–18.

Service tax on advisors’ commission: Service tax on fund advisors (distributors or sub-brokers) has been a point of contention. Last year, the government levied a 14% tax on fund advisors’ commissions. The fund houses deduct this amount out of the commission they pay to their distributors. The tax eats into the distributors’ profits, making the business unviable for them. But fund advisors play a critical role. They bridge the gap between fund houses and the masses. Fund houses cannot set up an extensive network of branches throughout the country. So, they rely on small advisors to carry their products to the people. Yesterday, the finance minister ended the service tax on small fund advisors. Those with an annual commission income of up to Rs 10 lakh are exempt. The move should benefit 38,000 fund advisors. This should increase retail participation in the financial markets.

Income tax exemption limit:

Mutual fund products target young professionals and middle-class Indians. These groups have limited financial knowledge and small investment corpuses. Hence, fund houses welcome any development that increases the investment corpus of these groups. After all, a reduction in the income tax rate increases their investable income. This year, the sector had hoped for an increase in the tax exemption limit to Rs 3 lakh. This could have created an excess of approximately Rs 50,000 crore, a lot of which could have come their way. Hence, the income tax slabs remaining unchanged has disheartened the sector.

Deductions under section 80C:

Section 80C of the Income Tax Act discusses the tax deduction limits for various expenses and investment products. The mutual fund sector wants an increase in the deduction limits. Such an increase could promote the investment habit in the country. Equity-linked savings schemes (ELSS) feature prominently in the discussions. These schemes offer the benefits of both equity investment and a saving scheme. At present, ELSS exemption limits stand at a mere Rs 1.5 lakh. Any further investments in the product face standard taxation rates. There were hopes of an increase in ELSS deduction limits this time around. But the budget provided no incentives for ELSS or any other products under 80C this year.

Simpler KYC procedure:

Know your customer (KYC) norms allow banking and financial services institutions (BFSIs) to be certain about the identity of their customers. The aim is to present misuse of their services. At present, all BFSIs (i.e. mutual fund advisors, banks, stock brokerages, etc.) start the KYC procedure individually for each customer. The process involves lengthy paperwork and time-consuming processes. But mutual fund companies and other BFSIs have a better solution. They have requested the government to set up an eKYC platform to ease the process. They also feel that an investor should undergo the KYC procedure only once for all institutions. Unfortunately, this year’s budget took no step to simplify the KYC procedure.




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