Mutual funds on bonus run in bid to offer tax cover

Mutual funds (MFs) have started doling out bonus issues in a rush. As many as five fund houses have announced bonus issues over the past fortnight and more are expected to follow suit.

The unit holders, who are to receive the bonus issues, could use them to reduce tax obligations - mostly in the form of deferment, and partly, through evasion.

Back-of-the-envelope calculations suggest tax obligation of a couple of hundred crores of rupees could be reduced through the bonus issues.

The funds which have proposed bonus issues include Escorts, ING Vysya, Cholamandalam and Reliance. Escorts has announced a 9:10 bonus for Escorts Income Plan.

ING Vysya has declared a 0.67:1 offer in ING Vysya Income Fund Institutional Plan. The payout offer is 4:5 and 1:1 for Chola F.I.S.T Institutional Plan and Reliance Vision, respectively.

Experts said though the debt schemes dominated the list, a handful of equity funds were expected to follow especially after Reliance Vision came out with its offer.

They say the deferment of tax through the bonus issues was permissible under the law as the investor carried the market risk by staying with the scheme.

To lower tax obligation, the procedure is simple. An investor purchases one unit of a scheme at net asset value (NAV), of say, Rs 12.50.

One unit comes free in case a 1:1 bonus is issued. Post-issue (or ex-bonus), the NAV of the scheme goes down to, say, Rs 11. The investor, who now owns two units, can sell his original unit at a loss of Rs 1.50 and adjust it with his capital gains. He carries forward the bonus unit beyond March 31, as required by law, and therefore, defers a part of his tax obligation.

Unlike the available tools in secondary market, bonus issues of mutual funds ensure that the investor has to cough up tax payment.

In secondary market, tax evasion is more rampant.

Stock operators show artificial high and lows, as per their requirement, on some hand-picked stocks.

"Jama kharchi", as it is called in stock market parlance, is responsible for converting black money into white as well as evasion of tax.

Worried with a huge surge in "jama kharchi", the Union finance minister last year restricted the capital gains exemption on the companies which comprise BSE 500 index. Nevertheless, the use of "jama kharchi" has been on the rise.