The latest budget proposal, raising the tax rate on long-term capital gains from 10 to 20 per cent on transfer of units of mutual funds besides increasing the period of holding in respect of such units from 12 months to 36 months, has put the mutual fund industry in a predicament. The industry is considering this as a ‘retrospective’ pain inflicted on mutual fund investors.

If one invests in a debt fund and plans to redeem it after a year or two, the budget proposal would reduce his/her returns due to more outgo on tax.

The industry feels that these measures may have a cascading effect. More so, a majority of the assets under management comes under the debt category.

There is also confusion since the Finance Bill has stated that the amendments would be effective from April 1, 2015. The Revenue Secretary, however, has clarified that the new tax rate would apply to income arising out of this source in 2014-15. This implies that income arising out of investments will be taxed from the current financial year (April 1, 2014 to March 31, 2015) . Many investors would have invested in debt funds during the start of the financial year itself, and some of them would have also paid the advance tax. These investors would now have to take additional burden.

The industry is concerned. As the new norms come with a ‘retrospective effect’, investors would shift their investments from mutual funds to other avenues due to higher taxes.

The retrospective taxation proposal is unfair for investors. They were unaware of their tax liability when they invested into these schemes already. The argument that the move is intended to bring parity between banking products and mutual fund investments does not hold water.

For, the principal is protected and the interest is assured in banking products.

“Is this not the same as the Vodafone case? ” described a top executive of a mutual fund house. Perhaps, the Finance Minister could consider giving effect to these measures from October 1, he felt.

There is a catch, however. If investors rush to redeem their investments before this date, the fund managers would see more outgo of funds. But then, would the AMCs, portfolio managers and vested parties allow this? Large corporates, which usually park their surplus money in short-term debt funds to earn attractive yields, would shy away, resulting in a reduced inflow under debt schemes.

At present, fixed maturity plans have a corpus of Rs.1.75 lakh crore with more than 70 per cent falling under 13-14 month fixed maturity plans.

varadharajan.srinivasan@thehindu.co.in