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What the budget has in store for mutual funds?

Feb 20, 2001

The Union Budget 2001-02 is less than 10 days away. There is a lot of anticipation building up in areas of dividend distribution tax and pension funds. The domestic mutual fund industry is currently witnessing a semblance of a slowdown and needs a strong tonic from the finance minister.

Leading the mutual fund industry’s wish list is withdrawal of distribution tax on dividends. Currently open-ended funds with over 51% equity composition can declare tax-free dividends. All other funds declare dividends only after deducting 22% distribution tax. The government is expected to rationalise the tax structure on demands made by several chambers of commerce especially since this has dampened mood in equity markets. With a rationalisation, mutual funds will also benefit.

Withdrawal of the distribution tax is something a lot of fund managers are looking forward to. In an interview to personalfn.com, Vivek Reddy of Kothari Pioneer revealed, ‘Among the steps the budget could take to stimulate the capital markets are - withdrawal of distribution tax an dividends declared by mutual funds/corporates and enhancement of the Rs.60,000 limit under Section 88 (rebate); also removal of sub-limits under Section 88.

P.S. Subramanyam (Unit Trust of India, Chairman) opined, ‘The government is likely to take a commercial view on this matter (distribution tax).’

Pension funds is another issue that has long been on the wish list of the domestic mutual fund industry. The industry wants the finance minister to permit mutual funds to launch individual retirement accounts (IRAs) with tax deferment benefits. IRAs along with the more popular 401 K account for over 1/3rd of the US mutual fund industry (total US$ 7 trillion).

After last year’s disappointing budget when distribution tax was hiked to 22% (effectively) and sections 54EA/EB (capital gains) were scrapped, the industry is looking forward to a healthy tonic to infuse some life into it.

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