The Budget had some major positives for the mutual fund investor with gold-linked mutual fund schemes and tax-saving funds getting a fillip.
Moreover, existing benefits like tax-free dividends and capital gains on equity-oriented schemes got a fresh lease.
There were no real negatives in the Budget for the mutual fund investor. Nonetheless, if we had to highlight just one, it would be the dismantling of Section 88. But even that dark cloud had a thick silver lining. But first let us understand what the Budget had in store for existing tax benefits.
Dividends on equity-oriented mutual funds (equity funds and balanced funds) continue to be tax-free in the hands of investors. Dividends on debt funds (which includes monthly income plans) to individuals and HUFs attract 12.5% distribution tax plus 2.0% surcharge.
Equity-oriented funds will now attract 0.020% Securities Transaction Tax (STT) on the cost of purchase. The STT has been raised marginally from 0.015% earlier. Debt funds are not tradable securities and will continue to attract long-term capital gains tax.
Short-term capital gains on equity-oriented mutual funds are charged at 10.0%, while those on debt funds are levied at the tax slab applicable to the investor.
To put it simply Section 88 is no more. That Section is now merged with other Sections like Section 80 L, Section 80 CCC to form a new section Section 80 CCE. With the dismantling of Section 88, the tax rebates associated with it have also become a thing of the past.
However, now investments up to Rs 100,000 can be made either singly or cumulatively across a host of investment avenues like tax-saving funds, NSC, PPF, fixed deposits and infrastructure bonds among others. Effectively, this means that investors can now invest upto Rs 100,000 in tax-saving funds from just Rs 10,000 earlier.
Gold-linked mutual funds
Although real estate mutual funds were widely perceived and anticipated to find their place under the Sun some time soon, their gold peers beat them to it.
The finance minister opened the floodgates for the introduction of gold-linked mutual fund schemes for retail investors. Gold, an important component in the investor's portfolio for its inflation-hedging prowess can now find a way in portfolios through the mutual fund route.
Strategy for the mutual fund investor
In light of the Budget, the investor needs to make two important adjustments to his mutual fund portfolio.
For the high risk investor who could never invest in tax-saving funds beyond Rs 10,000 a year, can now look at investing in them up to a maximum of Rs 100,000 to claim tax benefits.
With this, equities can now form a much larger component of the tax-paying investor's portfolio. In fact, even investors with taxable income of over Rs 500,000 who could not invest in tax-saving funds because Section 88 did not apply to them, can now look at investing in them.
Gold which was rarely considered for investment due to storage and liquidity hassles can now be a candidate for investment once gold-linked mutual fund schemes are launched. According to Personalfn's Asset Allocator Review a portion of the investor's assets must be invested in gold mainly as a hedge against inflation.
All in all, the Budget throws up some interesting options for the investor. His portfolio can now be tailor-made in line with his needs and risk profile rather than tax benefits. To put it simply, the Budget has unshackled the mutual fund investor.
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