Fund houses junk fixed maturity plans, return money to investors
NEW DELHI: One of Finance Minister Arun Jaitley's budget initiatives seems to have killed an asset class, or at least a substantial portion of it. Stunned by the change in tax rules for non-equity funds, fund houses are deferring forthcoming issues of fixed maturity plans (FMPs). At least four fund houses have confirmed that their FMPs have been deferred. Two have even returned money collected from investors for issues that closed last week. "The budget has killed one-two year FMPs," said a fund manager.
Before Jaitley's budget, FMPs were a popular investment option for many. Eight new FMP issues were scheduled to open this week and another nine that opened last week will close this week.
The measure is aimed at nixing the tax arbitrage that rewarded short-term investors in such plans compared with other investment avenues such as deposits. Life doesn't change much for longer term investors though.
While interest on fixed deposits is taxed as normal income, returns from debt funds were taxed at 10 per cent if held for more than a year. Now, returns from FMPs and other non-equity funds held for less than three years will be taxed at normal rates applicable to the investor.
This takes away the tax edge that FMPs and other debt funds had overfixeddeposits.Onlytwoof the eight new FMPs that were scheduled to open this week are for three years (1,095 days).
Existing investors in one-two year FMPs face a bigger problem.
They had invested with 10 per cent tax in mind but may end up paying 30 per cent if their total taxable income exceeds Rs 10 lakh. If a one-two year FMP matured after April 2014, the gains will be taxed as normal income of the investor. "The budget has spared corporates, but slapped individuals with another form of retrospective tax," said a senior executive at a large mutual fund. Some fund houses have approached the Securities and Exchange Board of India (Sebi) for permission to convert FMPs into open-end debt mutual funds on maturity. This will allow investors to extend their holding period beyond 36 months so that the returns are treated as long-term capital gains and taxed at 20 per cent with the benefit of indexation.
A fund house official said that if 90 per cent of unit holders agree, the mandate of the scheme can be changed to make it open end. In the past, many closed-end equity funds have been turned into open-end schemes.
However, a few fund houses believe this would amount to bending the rules just to escape tax. "Closed end equity funds were converted to open-end schemes because they were structured that way. Converting an FMP into an open-end scheme would require too many changes in the investment mandate of the fund," said a senior executive at a large mutual fund house. Mutual fund officials are also doubtful that their pleas will get heard. "This decision will not be taken in Mumbai (by Sebi) but in Delhi (by the finance ministry). Going by the stance of the government, it seems unlikely they will allow such conversion of FMPs to open-ended schemes," says a top mutual fund official.
While the new rule is a big blow for investors looking for lower tax on short-term debt investments, it won't have much effect on long term investors in debt funds. Until now, investors in non-equity funds had the option to pay either a flat 10 per cent long-term capital gains tax or 20 per cent after indexation.
The budget has raised the 10 per cent flat tax to 20 per cent but retained the option of 20 per cent with indexation. Most investors usually opt for indexation, more so in these times of high inflation.
Economics Times
Thanking you
Regards,
Rajesh Kumar Kathpalia ¤ SMC Global
17,Netaji Subhash Marg,Daryaganj,
New Delhi-110002 Mobile No 9891645052
Email Id: rajesh.ipo@smcindiaonline.com
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Before Jaitley's budget, FMPs were a popular investment option for many. Eight new FMP issues were scheduled to open this week and another nine that opened last week will close this week.
The measure is aimed at nixing the tax arbitrage that rewarded short-term investors in such plans compared with other investment avenues such as deposits. Life doesn't change much for longer term investors though.
While interest on fixed deposits is taxed as normal income, returns from debt funds were taxed at 10 per cent if held for more than a year. Now, returns from FMPs and other non-equity funds held for less than three years will be taxed at normal rates applicable to the investor.
This takes away the tax edge that FMPs and other debt funds had overfixeddeposits.Onlytwoof the eight new FMPs that were scheduled to open this week are for three years (1,095 days).
Existing investors in one-two year FMPs face a bigger problem.
They had invested with 10 per cent tax in mind but may end up paying 30 per cent if their total taxable income exceeds Rs 10 lakh. If a one-two year FMP matured after April 2014, the gains will be taxed as normal income of the investor. "The budget has spared corporates, but slapped individuals with another form of retrospective tax," said a senior executive at a large mutual fund. Some fund houses have approached the Securities and Exchange Board of India (Sebi) for permission to convert FMPs into open-end debt mutual funds on maturity. This will allow investors to extend their holding period beyond 36 months so that the returns are treated as long-term capital gains and taxed at 20 per cent with the benefit of indexation.
A fund house official said that if 90 per cent of unit holders agree, the mandate of the scheme can be changed to make it open end. In the past, many closed-end equity funds have been turned into open-end schemes.
However, a few fund houses believe this would amount to bending the rules just to escape tax. "Closed end equity funds were converted to open-end schemes because they were structured that way. Converting an FMP into an open-end scheme would require too many changes in the investment mandate of the fund," said a senior executive at a large mutual fund house. Mutual fund officials are also doubtful that their pleas will get heard. "This decision will not be taken in Mumbai (by Sebi) but in Delhi (by the finance ministry). Going by the stance of the government, it seems unlikely they will allow such conversion of FMPs to open-ended schemes," says a top mutual fund official.
While the new rule is a big blow for investors looking for lower tax on short-term debt investments, it won't have much effect on long term investors in debt funds. Until now, investors in non-equity funds had the option to pay either a flat 10 per cent long-term capital gains tax or 20 per cent after indexation.
The budget has raised the 10 per cent flat tax to 20 per cent but retained the option of 20 per cent with indexation. Most investors usually opt for indexation, more so in these times of high inflation.
Economics Times
Thanking you
Regards,
Rajesh Kumar Kathpalia ¤ SMC Global
17,Netaji Subhash Marg,Daryaganj,
New Delhi-110002 Mobile No 9891645052
Email Id: rajesh.ipo@smcindiaonline.com
--
You received this message because you are subscribed to the Google Groups "Product Updates for AMC" group.
To unsubscribe from this group and stop receiving emails from it, send an email to Productupdatesforamc+unsubscribe@googlegroups.com.
For more options, visit https://groups.google.com/d/optout.
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