Budget 2023: Call For Parity In Treatment Between Mutual Funds And ULIPs

In the last three years, a sharp growth in mutual fund folios has made them veritable engines for investor participation in financial markets

One more suggestion is for the government to reintroduce Section 54E and 54F for reinvesting capital gains in mutual funds.

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The preparations for Union Budget 2023-24, to be presented by Finance Minister Nirmala Sitharaman on February 1, 2023, are already underway. This will be the last full Budget presented by the current government as the 2024 Budget would be a vote on account. What are the major expectations on the personal finance front?

Parity to mutual funds on investments and more

In the last three years, a sharp growth in mutual fund folios has made them veritable engines for investor participation in financial markets. As mutual funds find greater acceptance, expectations are also growing. One demand has been the call for parity in treatment between mutual funds and unit-linked insurance plans (ULIPs). Mutual funds are taxed on redemption while ULIPs are exempt from tax on maturity and redemption. Also, ULIPs allow free transfer of units among scheme categories, but in the case of mutual funds, even shifting from a regular option to a direct option entails capital gains. Since both are effectively investment products, they must be at par.

Then there is the demand from Public provident funds (PPF), where the stipulated upper limit is a bottleneck. Remember, PPF is a preferred option for Indian investors on account of its high post-tax returns. PPF investments are currently circumscribed by the upper investment limit of Rs 1.50 lakh per year. Union Budget 2023 is expected to enhance this limit to Rs 3 lakhs for greater headroom.

Time for rationalising tax provisions

Indian personal income tax rates are unnecessarily complicated at the entry-level and for that, the rebate system needs to go. Budget 2023 is expected to set Rs 5 lakh as the base tax-exempt limit and do away with rebates. Also, peak rates of income tax at 42.5 per cent for higher income groups are too high by global benchmarks. A quick word on the current dual system of taxation, which has only found 1 per cent takers, despite lower rates. That is because it scraps all exemptions. Budget 2023 can retain a standard deduction of Rs 50,000 and Section 80D for medical insurance in the new scheme since retirees are likely to opt for this new scheme.

To be fair, one must not expect STT to be scrapped at all. Here is why. STT is expected to contribute over Rs 23,000 crore in FY23, 75 per cent more than FY22. It is impractical to expect STT to be scrapped. It is possible that long-term capital gains may be scrapped or the exemption may be limited to equity holdings over three years. One thing that is likely in the budget is an enhanced exemption under Section 80C. Instead of the current Rs 1.50 lakh, Section 80C can be enhanced to Rs 3 lakhs. ELSS can be carved separately in Section 80C to encourage equity cult.

There are some more changes expected in the budget on the tax front. The current Section 24 limit for interest on home loans at Rs 2 lakh is out of sync with property prices in smaller towns; leave alone metros. The government can scrap the affordable housing exemptions and offer a blanket exemption of Rs 5 lakh. That would be more representative. One more suggestion is for the government to reintroduce Sections 54E and 54F for reinvesting capital gains in mutual funds. These were scrapped in 2001 and replaced with infrastructure bonds. Bringing back these tax breaks will encourage investors to reinvest capital gains in mutual funds.

A word of caution! Budget 2023-24 presents tough choices for the government. Macro stress, nine state elections in 2023 and central elections in 2024 call for a people-friendly Budget. However, with higher capex outlays and a fiscal deficit at 6.4 per cent of the GDP, the room for manoeuvre is limited. It will be a tightrope walk.

Nehal Mota is the co-founder of Finnovate.

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