Rollover of FMPs to impact tax target

The move by mutual funds to allow investors to roll over their fixed maturity plan (FMP) by two years to claim tax benefit may lead to an estimated revenue loss to the Income Tax Department of around ₹1,000 crore-3,000 crore this fiscal. The IT Department is struggling to meet the annual revenue target, given that recovery is still not fully underway due to an economic slowdown.

Move to nix arbitrage In a bid to nix the tax arbitrage, the Government has extended tax exemption offered to all non-equity schemes of MFs to three years from the earlier one year. In his maiden Budget, Finance Minister Arun Jaitley felt that short-term investors in these schemes enjoyed an undue advantage.

The proposal had an adverse impact on mutual funds’ close-ended fixed maturity plans as it directly competes with bank deposits. The MF industry has about ₹1.75 lakh crore assets under FMPs. Most of these plans are of one- to two-years, maturing between January and April.

Roll over to gain Assuming about ₹1 lakh crore is to mature early next year, investors would have paid a tax between 10 per cent and 30 per cent, depending on the tax bracket they fall in. .

Prior to the Budget, investors were exempted from income tax as investment in these schemes for one year and above was considered long term.

In order to retain the money and let investors gain the tax benefit, the MF industry has been trying to convince investors to roll over their investment for two years.

Market regulator SEBI has allowed MFs to roll over the scheme with the written consent of investors. FMP is the most popular among large trusts and high networth investors who park their long-term funds in these schemes to earn tax-efficient returns.

Nullifies Budget proposal G Pradeepkumar, CEO, Union KBC, said the FMPs are rolled over only for those investors who opt for it in writing, but for others, the money would be directly credited to their bank accounts on maturity of the schemes.

Many market experts said the option to roll over would nullify the Budget proposal. Moreover, they said, letting a few investors exit and retain the rest in FMPs goes against the very nature of close-ended schemes.

A Balasubramanian, CEO, Birla Sun Life MF, said the conversion rate was about 40-50 per cent with most of the high networth investors opting for a roll over, while it has been a mixed bag among corporate and retail investors.

“I do not see anything wrong. What would the mutual fund investor do if a tax is levied on an investment that was done prior to the amendment of the law? The Finance Minister has not done the right thing by imposing the tax,” Pranay Bhatia, Partner, BDO India LLP, said.

Some analysts say, since the NAV is continuing at same level even after the rollover, there is no question of tax evasion.

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