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Jaitley Removes Retrospectivity in Debt Mutual Funds, But FMPs Will Still See Tears

NDTV reports that the higher tax on debt mutual funds will apply only from July 10 onwards, and not “retrospectively”, from a statement given by Arun Jailtley (Finance Minister) to Parliament.

Which needs a change in the finance bill, to state that units of non-equity mutual funds that have been sold between April 1 2014 and July 10, 2014 and held for more than one year from purchase will be attract long term capital gains. This means a “proviso” needs to be added stating this intention.

However for investors in FMPs who bought for a year’s holding for the tax exemption, their exit will be classified as a short-term gain, and it’ll be added to their income. For them it’s retrospective by implication, since they had no idea about this when they invested.

Read: The Murder of the Debt Mutual Fund in this budget.

But the concept of retrospective taxation is only that a rule should apply on after the rule has been announced. In this case, the only reason that the rule was retrospective was that the budget came in July (usually in February). The difference? A Feb announcement allows a month to be able to do things since the tax changes apply from April onwards. A July announcement – because the budget was postponed due to the elections – is applicable, from the same April, so technically, it will apply to transactions made from April to July as well. This aspect has been addressed by Jaitley’s statement.

Lesson: Don’t invest in things because of tax benefits alone. The fact remains that short term funds, even today, give way better returns than fixed deposits, and even if the two were equally taxed (as they are now) I would choose the short term mutual fund.

  • shinu says:

    Dear Deepak
    still confused totally to core as what is the best way forward for a person who invested in a debt mutiual fund a large amount in May 2014 for a need in one year from then.
    Exit now in July 2014 and enter FD?
    Exit in June 2015?
    Exit in June 2017…. if possible only?

    • 1) Exit in Jun 2017 (if possible) but here again you hope Jaitley doesnt change rules again.
      2) Exit in Jun 2015 as per your original schedule and try to get some short term capital losses to offset these gains. One thing you can do for that is to buy a stock that is going to issue bonus shares, sell the non bonus shares three months after the record date. But that’s too complex 🙂

  • DJ says:

    Why didn’t they get such a simple thing right the first time around? And, even now, they haven’t removed the retrospective applicability fully. Just makes one wonder that the bureaucrats in the finance ministry must be of such poor quality that they can’t even get such a simple thing right. And, even now! And, even after saying that they won’t do such a thing after the GAAR confusion! The entire finance ministry ought to be checked into a mental asylum. If not for this, then for the insanity of micro-management of a country of a billion people, on deciding things like duties on rubber for chappals and what not. How can they possibly justify such micro-management when they should be focused on large policy matters? They must be seriously, seriously retarded.

  • R Parikh says:

    It is indeed sad that the FM & Narendra Modi’s Govt etc are not walking the talk? Don’t they understand that what they have done is definitely retrospective? Example if FM agrees to remove the tax exemption on tax free bonds worth thousands of crores of rupees issued over the last two years & their interest becomes taxable will it not be retrospective? Few years back when Insurance Ulips section was amended it was clarified before the budget was passed that the sum assured to be at least 5 times (now 10 times) would apply to only new Insurance Policies taken & not those issued before the Budget/new FY. Why then not amend the Finance Act so that the new provisions apply only to Mutual Funds “Purchased or Invested” after the presentation of the budget i.e. Jul14 & not to “redemptions/maturities” of mutual funds post budget? Hope fair sense still prevails, and those in power & governing and also Jyotirday Scindia understand the true & in spirit meaning of the word retrospective & still amend the Finance Bill for the said clause to apply only to investments made post budget presentation. Why don’t the seniors i.e. Rajya Sabha members understand & get the said amendment before passing or the President?

  • shinu says:

    thanks Deepak, I have said goodbye to the complicated world of direct equities years back and was relying on the mutual funds route. Seems the political parties and their flip flop policies will never allow small investors to feel comfortable to be back in the financial market and only will shed crocodile tears for the publics non participation. 🙁

  • kumaresh says:

    FMPs that matured during FY 2014-15 before the budget (many of which had double-indexation benefits) are now income chargeable to tax at normal rates!
    However, if the Finance Minister can retrospectively change things, i think the Funds are well within their rights to retrospectively amend their issue terms (& SEBI must approve it in the same spirit) to allow investors in FMPs with less than 36 months maturity period the OPTION to extend their FMPs for such additional periods so as to be of 36 months duration. This way the retail investor who chose the FMP instead of FD (many of these FMPs were issued by SBI, UBI, etc! last July) can so plan his affairs so as to attract the least tax!
    i sincerely hope the the FM will not put a spoke in this too and more over he will make the amendments effective for those FMPs which matured on or after July 12, 2014 (else he would be doing nothing better than the UPA !)

  • Sundar says:

    For retail debt investors this is not a bad deal. If you look at cost inf lation index from FY 11-12 till now it is 785/852/939/1024. This is abt. 9% increase pa. If you keep money in PPF it almost gives the same return. So let us lump it.

  • Sundar says:

    Today I received e-mail from Reliance MF informing about extension of their short term FMP to 36 month FMP.