Mumbai: Mutual fund houses have started approaching the market regulator Sebi seeking the extension of tenure of the fixed maturity plans (FMP) following the unfavourable tax treatment meted out in the recent Union Budget.
According to sources, fund houses are requesting the regulator to extend the tenure of one year FMPs to three years so that investors don’t have to pay the short-term capital gain tax, which is at present charged at the rate of 30 per cent.
Sources added that fund houses like L&T MF and DSP BlackRock MF have already got the necessary regulatory approval to extend the tenure of their FMP’s from one year to three years while others are planning to approach the regulator shortly.
“It makes sense for the investors to invest in debt funds with an investment horizon of more than 36 months or three years as investments for less than three years no longer qualify for long-term capital gains tax benefit (20 per cent with indexation). Returns earned on one year FMP would be treated as short-term capital gains and hence taxed at investor’s marginal tax rate,” said a spokesperson from L&T Mutual Fund.
The Budget has proposed to increase the rate of tax on long term capital gains (LTCG) from 10 per cent to 20 per cent on transfer of mutual fund units other than equity oriented funds. Additionally, the Budget also proposed to increase the holding period in respect of such funds from 12 months to 36 months to be categorised as long-term capital gains.
“We are also planning to seek Sebi approval to extend the tenure of our two to three one-year FMP schemes that are maturing next month. Investors who choose to roll over their schemes and stay invested in the scheme for three years will have to pay long-term capital gains tax of just 20 per cent as against the 30 per cent short-term capital gains tax that would be applicable if they redeem it now. So some investors may choose to stay invested while others may redeem their units disregarding the unfavourable tax structure applicable to them,” said Lakshmi Iyer, head of fixed income and products at Kotak Mutual Fund.
Fresh inflow into FMPs with a tenure of one to two years have dried up, few fund houses have withdrawn the launch of five to six FMPs.
