MFs demand tax sops for FoFs, debt funds

Fund managers expect more clarity regarding the treatment of long-term capital gains tax in fund of funds (FoF) schemes in the Union budget.

Removal of dividend distribution tax in debt schemes and keeping the existing tax on bank fixed deposits are needed to make debt fund investments attractive, they said on Wednesday.

Finance Minister P Chidambaram will present the Union budget for 2006-07 on February 28.

Rajat Jain, chief investment officer, Principal Mutual Fund, said, "The tax treatment in case of FoFs and close-ended schemes is different from open-ended equity schemes. FoFs and close-ended schemes should be brought on par with open-ended equity schemes."

SBI MF CIO Sethuram Iyer agreed with Jain's opinion on brining clarity on fund of funds' tax structure. At present, there are no long-term capital gains in open-ended equity schemes.

Iyer said, "There is a need for clarity on FoFs' tax structure."

Many other MFs like HDFC Mutual are also waiting for tax clarity for deciding their FoF scheme launch.

Prudential ICICI Mutual MD Pankaj Razdan said, "We believe capital gains and STT are adequate incentives to encourage investment in markets. However, on the corporate tax front, simplification of the tax structure and some rationalisation of the rates would be a welcome move."

Fund managers said the budget should have some provisions to make debt schemes attractive like removal of dividend distribution tax.

Iyer said, "If he (FM) removes dividend distribution tax, it will be a big boost to debt schemes." Currently, there is no dividend distribution tax in equity schemes.

Debt schemes have lost their shine in the last two years owing to a lot of negative factors.

Rising global crude oil prices and interest rates, tightness in domestic liquidity due to government borrowing, advance tax payments and SBI's India Millennium Deposit maturity in December, along with reverse repo and repo rates hikes has led to weak debt market.

To make debt schemes attractive, fund managers feel that the finance minister should not remove the tax on bank fixed deposits as these will make FDs a better investment alternative compared with debt funds.