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Mutual Funds



Budget provisions

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    Earlier investors with long-term capital gains could get relief under section 54EA/EB by investing in specified bonds/debentures, shares of a public limited company and units of a mutual fund. Under the provisions of the budget, tax benefit can be derived by investing only in NABARD (National Bank for Agricultural and Rural Development) bonds and not in bonds/debentures, shares and/or units of a mutual fund.

  • The imposition of 20% tax on dividends declared by debt-oriented schemes is another significant change. This has increased the effective tax rate for debt schemes from 11% (earlier) to 22%.


    Budget impact


    Mutual Funds (MFs) had positioned themselves as an avenue for investors to park their long-term capital gains. This along with their good performance was one of the reasons why inflows in MFs have been on the rise. Some MFs even had dedicated 54EA/EB options under each scheme for its investors. With the change in the provision of 54EA/EB, inflows in MFs will decline as investors with long-term capital gains may no longer find it an attractive investment avenue.

    This will also have a negative impact on inflows in the capital markets.

    The imposition of 20% tax on debt schemes will impact assured return schemes adversely. Debt fund managers were already dealing with declining interest rates and now have to deal with higher dividend taxes.

    The tax-free nature of dividends declared by equity schemes, combined with their excellent performance, are factors that will push more investors to equity schemes as opposed to debt schemes.


    Budget Impact:  Mutual Funds Sector Analysis for 2002