Allow launch of debt-linked savings scheme, mutual fund industry urges government

The mutual fund industry has urged the government to allow the launch of a debt-linked savings plan and lift restrictions on investments in equity-linked savings plans.

In its pre-budget representation, the industry body Association of Mutual Funds (AMFI) in India said the bond market remained small and shallow and the responsibility for providing loan capital fell largely to the banking sector. , which is unable to expand their loan portfolios until they address existing bad debts, especially after the Covid pandemic.

AMFI has proposed to introduce a debt-linked savings scheme modeled on the equity-linked savings scheme to channel retail investors‘ long-term savings into higher-rated debt securities with appropriate tax benefits that will help deepen the bond market.

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He further proposed that investments up to ₹1.50 lakh under the DLSS should be eligible for a tax benefit in a separate subsection and subject to a lock-up period of 5 years.

The amount to be invested in ELSS is in multiples of ₹500, with a minimum of ₹500. The rule was introduced to facilitate the acceptance of cash subscriptions. Currently, mutual fund transactions are done electronically or by cheque. Therefore, the requirement of multiples of ₹500 has lost its relevance and investment in multiples of ₹1 should be allowed, he said.

Authorization to launch a pension plan with the same treatment as the NPS

The mutual fund body has also applied for permission to launch a pension scheme with the same treatment as the national pension scheme. While the NPS is eligible for tax exemptions under Section 80CCD, mutual fund schemes of a similar nature are eligible for tax benefits under Section 80C. All mutual funds should be allowed to launch pension plans, he said.

The minimum holding period for listed securities to qualify as a long-term investment for capital gains tax purposes is 12 months, while for debt-focused mutual funds including ETFs, it is 36 months. The minimum holding period for debt ETF units to qualify as a long-term investment for capital gains tax purposes must be set at 12 months at par with the listed securities.

Gold ETFs and Gold Linked MF Schemes are treated as “non-equity funds” for income tax purposes. Therefore, the minimum long-term investment holding period for capital gains tax purposes in respect of Gold ETF shares is 3 years, attracting LTCG tax at 20% with indexation, while short-term capital gains are taxed at the marginal tax rate applicable to the policyholder.

The launch of Sovereign Gold Bonds made Gold ETFs and Gold Linked MF Schemes less attractive, resulting in a lack of interest. In terms of liquidity, Gold ETFs are superior to SGB because Gold ETFs provide continuous liquidity to investors. Reducing the holding period of gold ETFs for LTCG purposes from 3 years to 1 year will help increase retail investment in ETFs and shift demand for gold from the physical market to financial savings .

Dolores W. Simon