Mutual fund industry body Association of Mutual Funds of India (AMFI) has asked the Finance Ministry for more tax exemptions for retail investors. They want equity-linked savings schemes (ELSS) offered by mutual funds included in the tax exemption available under Sec 80CCG of the Income Tax Act.

This section allows for an exemption of ₹25,000 for first-time investor. However, this is currently available only for first-time equity investors under the Rajiv Gandhi Equity Savings Scheme (RGESS) through the Finance Act 2012.

As of now retail investors with annual incomes below ₹12 lakh creating their first demat account can claim a 50 per cent deduction on a maximum investment of ₹50,000 in approved listed stocks or certain exchange-traded funds run by mutual fund houses. However, this tax exemption mostly goes unutilised and the tax benefit has not expanded the retail investor base as expected. Therefore, AMFI wants this to be extended to ELSS funds.

ELSS betters RGESS According to data with depositories NSDL and CDSL, just over 52,000 RGESS accounts have been created as of December 2015 with total investments of about ₹145 crore (at cost of acquisition). Compare this with the ₹2,903 crore invested in ELSS funds in just this financial year.

Investments in ELSS funds are already eligible for tax exemptions in the ₹1.5 lakh limit under Section 80C. “But 80C is over-crowded with exemptions for provident fund investments, housing loan repayments, and insurance premium expenses, among others,” says CVR Rajendra, CEO, AMFI.

“The investment limit gets used up very quickly and investors aren’t able to claim tax benefits for their ELSS investments. By allowing ELSS under Sec 80CCG, all retail investors and those under the high-tax brackets will benefit and can claim higher deductions on their equity investments,” he said.

ELSS funds are basically diversified mutual funds that invest over 65 per cent of their corpus in equities. Up to ₹1 lakh invested in ELSS funds in a year is eligible for deduction under Section 80C, while dividends earned and long-term capital gains are tax-free. AMFI believes that the government can more effectively increase the retail investor base if it allows an additional exemption for ELSS investors.

Pension products Vidya Bala, Head of Research, FundsIndia.com, doesn’t buy AMFI’s argument entirely, however. “The majority of investors don’t even use up their Sec 80C entitlements fully,” she said. “Even among young investors, ELSS has not really picked up very well. What would be useful is for the Budget to give tax exemptions for pension products by MFs, such as the tax exemptions given to NPS.”

AMFI is moving on this front as well, and has asked for the ₹50,000 exemption allowed to the National Pension Scheme under Sec 80CCD to pension products promoted by mutual funds. Besides, it has asked the Ministry to allow Sec 54 EC exemption (from gains on the sale of a long-term capital asset, such as home) to investments in infrastructure funds. Currently, the exemption is allowed only for investments in bonds of NHAI, REC and Nabard. AMFI has also asked for long-term capital gains from fund of fund schemes to be made non-taxable from the next fiscal.

“I can only say that our requests were met with positively by the Ministry,” Rajendran of AMFI added. “Ultimately, what the government allows will depend on the revenue implications arising from these exemptions.”

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