Finance Minister Arun Jaitley last week in his budget proposals had said that long-term capital gains tax on debt-oriented mutual funds will go up to 20 percent from 10 percent. The move is part of government's effort to bring parity with banks and other debt instruments.
Besides, in the Budget 2014-15, the government has proposed to change the definition of 'long term' for debt mutual funds to 36 months from 12 months now.
According to industry experts, the proposals in the budget would have a negative impact on the mutual fund industry as majority of assets under management comes under the debt category.
Also, Fixed Maturity Plans (FMP) and short-term bond funds are expected to be hit due to change in the capital gains definition.
"Association of Mutual Funds in India (AMFI) has written a letter to SEBI regarding budget's proposals for mutual funds and will sent it to the capital market regulator today or by tomorrow, "an official said.
AMFI has appealed that new budget rules be applied to close-ended debt schemes as against all non equity MF schemes as proposed, he added.
Jaitley in his maiden budget had said that in the case of debt mutual funds, the capital gains arising on transfer of units held for more than a year is taxed at a concessional rate of 10 percent whereas direct investments in banks and other debt instruments attract a higher rate of tax. This allows tax arbitrage opportunity.
This arbitrage has hardly benefited retail investors as their percentage is very small among such mutual fund investors, he said.
"With a view to remove this tax arbitrage, I propose to increase the rate of tax on long term capital gains from 10 percent to 20 percent on transfer of units of such (mutual funds other than equity oriented funds) funds," Jaitley had said in his budget speech.
These amendments will be effective from April,1 2015 and will accordingly apply, in relation to the assessment year 2015-16 and subsequent assessment years.