Corporates turn to arbitrage funds post debt tax increase
Corporates turn to arbitrage funds post debt tax increase
Following increase in tax rate for debt mutual funds, corporate and wealthy investors have turned to arbitrage funds with 'bonus component'.
According to industry players, nearly Rs 10,000 crore has flown into such schemes since Budget announcement that debt mutual funds will be taxed at a higher rate. A single mid-sized fund house alone is said to have mopped up over Rs 5,000 crore.
'Bonus-stripping' feature in these schemes is proving to be a big draw for investors as it helps them taxes. The strategy to buy a security ahead of a bonus and then selling the original units to book short-term capital loss is known as 'bonus stripping.' The loss booked is offset against other short-term capital gain.
Earlier, debt plans came with 'bonus' option, however, with the change in the tax structure, arbitrage schemes, which come in equity category, are being popular. Industry players said around half of the Rs 10,800 crore worth of inflows in equity schemes, seen last month could, have gone into such schemes. The quantum of money following into such schemes could only increase going ahead, they said.
According to industry experts, at least 10 asset management companies (AMCs) are currently offering schemes with bonus stripping feature and assets under such schemes could be more than Rs 25,000 crore. Some fund houses are choosing not to offer such schemes on concerns that they might come under regulatory scanner in future.
"Bonus stripping has become one of the ways for the AMCs to gather assets. While technically there is nothing illegal in the practice as per the current income tax guidelines, this could fall under the radar of income tax authorities at some point of time as a way of tax avoidance," said Niranjan Risbood, director (fund research) at Morningstar India.
Such schemes try to exploit an anomaly in taxation and are not in violation of laws, experts point out.
Dhirendra Kumar, CEO, Value Research said that there is nothing illegitimate about such schemes as long as the information on bonus announcement is not leaked.
However, some industry players don't rule out that information on bonus declaration is leaked more than 90 days in advance to select investors.
As per the provision of Income Tax Act, if original units are acquired within a period of three months prior to the record date and any bonus units are allotted based on the holding of original units, the losses (if any) on sale of original units within a period of nine months after the record date, shall be ignored in the computation of the unit holders' taxable income.
Prior information on bonus announcement, helps investors circumvent the restrictive rule against bonus stripping by timing their investment and redemption date in the scheme.
Investors make a killing by doing so, as the original units are sold post allotment of bonus units, which are sold after one year to save on capital gain tax.
For instance, an investment of Rs 100 in 'bonus stripping' plan, with a assumed bonus of 85% and returns of 8.5%, will result in a gain of at least Rs 20, that, too tax-free for typical holding period of just 15 months. On a tax-adjusted basis the returns could be as high as 35%.
"Bonus stripping provides a tactical way of reducing tax payouts. Moreover, since fund houses offer this strategy within the regulatory framework, it turns out to be a win-win situation for both the AMCs and investors," said an industry expert asking not to be named.
Experts said that divulging bonus information to investors is a practice that fund houses should avoid to save such schemes from regulatory axe.
Businesss Standard
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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Following increase in tax rate for debt mutual funds, corporate and wealthy investors have turned to arbitrage funds with 'bonus component'.
According to industry players, nearly Rs 10,000 crore has flown into such schemes since Budget announcement that debt mutual funds will be taxed at a higher rate. A single mid-sized fund house alone is said to have mopped up over Rs 5,000 crore.
'Bonus-stripping' feature in these schemes is proving to be a big draw for investors as it helps them taxes. The strategy to buy a security ahead of a bonus and then selling the original units to book short-term capital loss is known as 'bonus stripping.' The loss booked is offset against other short-term capital gain.
Earlier, debt plans came with 'bonus' option, however, with the change in the tax structure, arbitrage schemes, which come in equity category, are being popular. Industry players said around half of the Rs 10,800 crore worth of inflows in equity schemes, seen last month could, have gone into such schemes. The quantum of money following into such schemes could only increase going ahead, they said.
According to industry experts, at least 10 asset management companies (AMCs) are currently offering schemes with bonus stripping feature and assets under such schemes could be more than Rs 25,000 crore. Some fund houses are choosing not to offer such schemes on concerns that they might come under regulatory scanner in future.
"Bonus stripping has become one of the ways for the AMCs to gather assets. While technically there is nothing illegal in the practice as per the current income tax guidelines, this could fall under the radar of income tax authorities at some point of time as a way of tax avoidance," said Niranjan Risbood, director (fund research) at Morningstar India.
Such schemes try to exploit an anomaly in taxation and are not in violation of laws, experts point out.
Dhirendra Kumar, CEO, Value Research said that there is nothing illegitimate about such schemes as long as the information on bonus announcement is not leaked.
However, some industry players don't rule out that information on bonus declaration is leaked more than 90 days in advance to select investors.
As per the provision of Income Tax Act, if original units are acquired within a period of three months prior to the record date and any bonus units are allotted based on the holding of original units, the losses (if any) on sale of original units within a period of nine months after the record date, shall be ignored in the computation of the unit holders' taxable income.
Prior information on bonus announcement, helps investors circumvent the restrictive rule against bonus stripping by timing their investment and redemption date in the scheme.
Investors make a killing by doing so, as the original units are sold post allotment of bonus units, which are sold after one year to save on capital gain tax.
For instance, an investment of Rs 100 in 'bonus stripping' plan, with a assumed bonus of 85% and returns of 8.5%, will result in a gain of at least Rs 20, that, too tax-free for typical holding period of just 15 months. On a tax-adjusted basis the returns could be as high as 35%.
"Bonus stripping provides a tactical way of reducing tax payouts. Moreover, since fund houses offer this strategy within the regulatory framework, it turns out to be a win-win situation for both the AMCs and investors," said an industry expert asking not to be named.
Experts said that divulging bonus information to investors is a practice that fund houses should avoid to save such schemes from regulatory axe.
Businesss Standard
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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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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