The mutual funds industry is going through an interesting phase and with the increasing investor awareness, the growth potential is immense.
The Union Budget 2019 will be an interim one but the mutual funds industry will be keenly looking forward to it specially because of the volatile phase that the stock markets have been going through and 2019, being the Election Year means that there is going to be more volatility.
A few changes/announcements in the Union Budget can help bring stability in the market while making the investments in mutual funds more lucrative and beneficial for the investors:
- Removal of Tax on Long Term Capital Gain (LTCG): Re-introduction of tax on LTCG in the last budget was the beginning of the volatile phase in the market. The removal of tax on LTCG now could mark end of it! Government is not going to gain much out of it in the current financial year since the markets have remained subdued throughout the year. LTCG, in any case, does not make sense because of levy of Securities Transaction Tax (STT) on listed securities, which was the primary reason for removal of LTCG earlier. Introduction of LTCG has also complicated the taxation structure on listed securities / equity mutual funds, which goes against current government's push for simplifying things. Domestic retail investors have supported the markets throughout 2018 when FIIs continued to sell. Removal of LTCG will help channelize more funds to markets either directly or through mutual funds.
- Increase in Tax Exemption Limit: The limit for income tax deduction under under 80C of the Income Tax Act has remained Rs. 1.5 lakh for many years now and it can be revised to Rs 2 lakhs. This would help domestic capital markets as ELSS record higher inflows and more consumption (due to taxes saved) helps listed companies' bottomline, leading to overall positive sentiments.
- Removal of Dividend Distribution Tax (DDT): DDT should be scrapped as it involves dual taxation. Companies pay dividends out of profits which are already taxed, so dividends should remain tax free as was the case prior to previous budget.