Story I wrote yesterday on impact of Budget move on LTCG and dividend distribution tax on mutual funds:
http://www.cogencis.com/differentiators/ShareNews.aspx?newsId=1132741
[C] BUDGET: Cap gains tax, dividend tax to reduce mis-selling by MFs
Cogencis, Thursday, Feb 1
By Rajesh Gajra
NEW DELHI - Equity schemes and equity-oriented hybrid schemes of mutual
funds will be hit by the Budget's imposition of a 10% tax on long term
capital gains from investments in equity oriented schemes of mutual funds.
This came on the back of a similar 10% long term capital gains tax on
investments in equity shares of listed companies.
Long term capital gains arise when an investment is sold off after a
minimum holding period of one year at a profit.
The capital gains tax on equity funds will be applied prospectively with
January 31 being the base date for determining the cost of acquisition. The
derived capital gains will be taxed at 10% without inflation indexation
benefit.
The Budget has also made dividends declared by equity oriented funds
subject to a 10% dividend distribution tax.
The impact of the new tax proposals will be widely felt by the mutual
fund industry.
Just last year, the industry witnessed saw record inflows into equity
funds last year. In calendar 2017, equity funds saw net inflow of 1.49 trln
rupees, four times more than in the previous year.
Further, since the definition of equity oriented funds covers all mutual
fund schemes which invest more than 65% of its assets in equity shares, the
long term capital gains tax will also cover several hybrid funds where the
equity investments form more than 65% of assets size.
In the second half of last year, when some investors got concerned with
the high valuations of stocks in the equity market, fund houses aggressively
marketed equity-oriented hybrid funds as a safe bet.
Hybrid funds attracted strong net inflow of 881 bln rupees last year, 4.2
times more than in calendar 2016.
A chunk of this inflow went into equity-oriented hybrid funds which were
investing 65-80% in equities and the balance in debt securities.
Further, the monthly and quarterly dividend plans of hybrid funds were
pushed the hardest in an attempt to lure investors who would generally invest
in bank deposits and were disappointed with falling interest rates on bank
deposits.
In fact, 41% of average assets under management of all hybrid funds in
the quarter ended September were in dividend plans, with the balance being in
growth plans.
The 10% dividend distribution tax on dividends by equity oriented funds
will make dividend plans less attractive than before, and any one trying to
push dividend plans at the cost of growth plans will not find it easy any
more, G Pradeepkumar, CEO of Union Asset Management Co told Cogencis.
The long term capital gains tax and the 10% tax on dividends will reduce
churn and reduce mis-selling, according to Aashish Somaiyaa, MD and CEO of
Motilal Oswal Asset Management Co.
According to Pradeepkumar, the government had to levy a dividend
distribution tax on dividends as otherwise fund houses would have
circumvented the capital gains tax by using dividend plans to distribute
gains on investments to investors.
Interestingly, the tax arbitrage between debt funds and equity funds
(including equity-oriented hybrid funds) will also reduce.
According to Rajeev Thakkar, chief investment officer of PPFAS Mutual
Fund, taxation may cease to be a crtical factor in selection asset classes by
mutual fund investors.
While long term capital gains tax on equity funds will be at 10% without
inflation indexation benefit, that on debt funds will continue to be at 20%
with inflation indexation benefit, he said.
"Say a debt fund generates 8% returns and inflation is 5%. The tax will
come to about 20% on 3% or 0.6%. This comes to slightly less than 10% of the
returns," said Thakkar.
According to Jimmy Patel, MD & CEO of Quantum Asset Management Co, fund
Houses may have to realign the income distribution strategy on their schemes,
and fund houses prone to use dividend stripping may get reigned in. End
http://www.cogencis.com/differentiators/ShareNews.aspx?newsId=1132741
[C] BUDGET: Cap gains tax, dividend tax to reduce mis-selling by MFs
Cogencis, Thursday, Feb 1
By Rajesh Gajra
NEW DELHI - Equity schemes and equity-oriented hybrid schemes of mutual
funds will be hit by the Budget's imposition of a 10% tax on long term
capital gains from investments in equity oriented schemes of mutual funds.
This came on the back of a similar 10% long term capital gains tax on
investments in equity shares of listed companies.
Long term capital gains arise when an investment is sold off after a
minimum holding period of one year at a profit.
The capital gains tax on equity funds will be applied prospectively with
January 31 being the base date for determining the cost of acquisition. The
derived capital gains will be taxed at 10% without inflation indexation
benefit.
The Budget has also made dividends declared by equity oriented funds
subject to a 10% dividend distribution tax.
The impact of the new tax proposals will be widely felt by the mutual
fund industry.
Just last year, the industry witnessed saw record inflows into equity
funds last year. In calendar 2017, equity funds saw net inflow of 1.49 trln
rupees, four times more than in the previous year.
Further, since the definition of equity oriented funds covers all mutual
fund schemes which invest more than 65% of its assets in equity shares, the
long term capital gains tax will also cover several hybrid funds where the
equity investments form more than 65% of assets size.
In the second half of last year, when some investors got concerned with
the high valuations of stocks in the equity market, fund houses aggressively
marketed equity-oriented hybrid funds as a safe bet.
Hybrid funds attracted strong net inflow of 881 bln rupees last year, 4.2
times more than in calendar 2016.
A chunk of this inflow went into equity-oriented hybrid funds which were
investing 65-80% in equities and the balance in debt securities.
Further, the monthly and quarterly dividend plans of hybrid funds were
pushed the hardest in an attempt to lure investors who would generally invest
in bank deposits and were disappointed with falling interest rates on bank
deposits.
In fact, 41% of average assets under management of all hybrid funds in
the quarter ended September were in dividend plans, with the balance being in
growth plans.
The 10% dividend distribution tax on dividends by equity oriented funds
will make dividend plans less attractive than before, and any one trying to
push dividend plans at the cost of growth plans will not find it easy any
more, G Pradeepkumar, CEO of Union Asset Management Co told Cogencis.
The long term capital gains tax and the 10% tax on dividends will reduce
churn and reduce mis-selling, according to Aashish Somaiyaa, MD and CEO of
Motilal Oswal Asset Management Co.
According to Pradeepkumar, the government had to levy a dividend
distribution tax on dividends as otherwise fund houses would have
circumvented the capital gains tax by using dividend plans to distribute
gains on investments to investors.
Interestingly, the tax arbitrage between debt funds and equity funds
(including equity-oriented hybrid funds) will also reduce.
According to Rajeev Thakkar, chief investment officer of PPFAS Mutual
Fund, taxation may cease to be a crtical factor in selection asset classes by
mutual fund investors.
While long term capital gains tax on equity funds will be at 10% without
inflation indexation benefit, that on debt funds will continue to be at 20%
with inflation indexation benefit, he said.
"Say a debt fund generates 8% returns and inflation is 5%. The tax will
come to about 20% on 3% or 0.6%. This comes to slightly less than 10% of the
returns," said Thakkar.
According to Jimmy Patel, MD & CEO of Quantum Asset Management Co, fund
Houses may have to realign the income distribution strategy on their schemes,
and fund houses prone to use dividend stripping may get reigned in. End
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