Fixed maturity plans (FMPs) of less than three years will no longer have an edge over bank fixed deposits in terms of taxation. For all non-equity funds, the budget has doubled the rate of long-term capital gains tax to 20% with indexation and extended the minimum tenure for long-term capital gains from one year to three years. This will impact over 65 lakh retail portfolios across all categories of non-equity mutual funds with assets under management (AUM) of around R36,000 crore as on March 2014.
The finance minister, however, clarified last week in Parliament that the higher rate of 20% will not apply to units sold between April 1 and July 10. But units of debt-oriented MFs sold after July 10 will attract 20% tax against 10% earlier. Sudhir Kapadia, national tax leader at EY, feels it is good that the finance minister made changes to capital gains tax on non-equity MF redemptions applicable from July 11 and not retroactively.
“However, the ministry of finance should now work with the Securities and Exchange Board of India (Sebi) to make amendments to FMP regulations and allow these to become open-ended or else investors in FMP will be unfairly taxed on a short-term basis as the rules were different when they invested,” he adds.
Before changes to the 2014 Budget, short-term capital gains with holding period of less than one year were taxed at a marginal tax rate. There is no change in this structure after the budget. For investments over a period of one year, long-term capital gains were applicable at 10% without indexation, or 20% with indexation. Now, ‘long-term’ has been extended to three years and will be taxable at 20% with indexation.
Fixed maturity plans (FMPs)
They are closed-ended funds and fund houses invest in securities maturing on or before the maturity of the scheme. Earlier, fund houses used to launch 380-day FMPs in the last week of March. After the scheme matured in April next year, investors took double indexation benefit.
Niranjan Risbood, director, fund research at Morningstar India, says that many asset management companies are offering an option to roll over one-year FMPs for an additional two years with the consent of investors.
“Investors should consider this option to roll over in case they definitely do not require the money for the next two years. In such a scenario, these FMPs are likely to give better post-tax