The finance ministry will soon clarify on the applicability of the proposed 20% long-term capital gains tax on debt-oriented-mutual funds in cases where investment has been redeemed during the period between April 1, when the revised rate is proposed to take effect, and July 10, the date of its announcement, reports fe Bureau in New Delhi.
Finance ministry sources said that the 20% long-term capital gains tax on debt-oriented mutual funds would come into force from April 1 and, therefore, shall apply to income earned from sale of such securities from this fiscal onwards. However, in the case of units which were sold during the period between the beginning of the fiscal and the announcement of the new rate, a clarification will be issued.
The new rate as well as extending the holding period for classification as long term to 36 months from the earlier 12 months was an attempt to bring parity between different instruments. Market experts said these proposals would have a negative impact on the mutual fund industry as majority of assets under management comes under the debt category.
Finance minister Arun Jaitley had pointed out in his maiden budget that in the case of debt mutual funds, the capital gains arising on transfer of units held for more than a year was taxed at a concessional rate of 10% whereas direct investments in banks and other debt instruments attracted a higher rate of tax, which allowed a tax arbitrage opportunity. This opportunity, however, was not beneficial to retail investors as their holding was very small among such mutual fund investors.