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Tax sop for debt funds on cards

New Delhi, Feb. 22: A tax harmonisation exercise is being considered for the mutual fund industry with the government expected to do away with the long-term capital gains tax on debt funds. This will put debt funds on a par with their equity counterparts, which enjoys exemption from long-term capital gains tax, UTI officials said.

A debt fund is a mutual fund scheme that invests in debt instruments like government securities, treasury bills and corporate bonds. These funds are generally preferred by investors seeking steady income and not willing to take high risks.

Under the current norms, debt fund subscribers have to pay a flat rate of 10 per cent tax on long-term capital gains. If an investor holds on to his mutual fund investment for more than a year, it is considered to be a long-term capital asset.

“At present, only a small percentage of domestic savers are parking their investible surplus in mutual funds. While the customer base of the entire mutual fund industry in the country is about 1 crore, the total life insurance policy holders would be more than 7 crore. This only reflects the tremendous growth opportunities for the mutual fund sector,” an UTI executive said.

In his last budget, the finance minister had granted long-term capital gains tax exemption to subscribers of equity schemes of mutual funds.

Market analysts said equity-linked mutual funds on an average posted a return of over 40 per cent in 2005. While this is seen as extraordinary profit, in normal times, mutual funds are projected to yield a return of more than 20 per cent.

However, long-term capital gains tax on debt-oriented schemes are also keeping a certain portion of investors away from the mutual fund pool. “A typically conventional saver would prefer a debt scheme more than an equity-oriented one because of the very nature of the stock markets. Extending the tax benefits to debt schemes would only help bring in a large number of new retail investors into the mutual fund market,” the official said.

Besides, the industry is also expecting that distortions in the present structure of the securities transaction tax (STT) would be rectified. According to the current provisions, STT is payable by investors at the time of redemption of units from the fund as well as on purchase/sale of units on bourses.

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