Mutual Funds

Budget Impact

The decision to tax mutual fund dividends in the hands of investors could have a disastrous impact on the fortunes of the industry. With this move, investors will now pay tax on dividends at the rates applicable to them and not at a flat 10% (paid by the mutual fund) as was the case earlier. This will adversely impact investors who have historically been choosing the dividend plan under their mutal fund investments. They will now have to bear the tax burden. Investors have the option to switch to the growth plan, but will not get a regular income stream. Also, with the decision to tax mutual fund dividends in the hands of investors, the difference between the post-tax returns of fixed deposits and mutual funds has narrowed considerably, and 'safer' investors may just begin to look at FDs with increasing interest.

Section 88 (rebate) which was applicable for the ELSS (equity-linked saving scheme) investor has also been modified to the horror of retail investors. This section now works differently for different investors. As far as investors with an annual income of over Rs 500,000 are concerned, this section does not exist at all. As far as investors earning an income between Rs 150,000-500,000 are concerned, this section only allows them 10% tax rebate, as opposed to 20% earlier. So in effect, the maximum tax rebate one can get under an ELSS is Rs 1,000 (at 10% of Rs 10,000) as compared to Rs 2,000 earlier. ELSS was a major attraction for the risk-taking investor class largely due to the tax benefit. After the budgetary recommendations, this product will lose its appeal to a large extent.

Budget Wishlist

Currently, dividends from mutual funds are tax-free in the hands of investors. The industry would like that to continue for a while as dividends are a major draw with investors.

Under section 88, investments upto Rs 10,000 are eligible for a tax rebate (i.e. maximum Rs 2,000). The industry would like this limit to be hiked to Rs 20,000.