Mutual funds have sold as much as Rs4,500 crore of debt in two days leading to higher bond yields. Are mutual fund investors redeeming their debt mutual fund investments due to the new tax norms?
Last year, we saw bond yields rise as foreign investors started heavily selling Indian debt. This year after the budget announcement, mutual funds have sold as much as Rs4,500 crore of debt in two days. This has been the highest amount sold on two consecutive days since 31 July 2013. On 10 July 2014, the Union Budget 2014-15 announced, higher long-term capital gain (LTCG) tax for non-equity mutual funds. On the day of the budget mutual funds sold Rs1,183.50 crore of debt and on the next day as much as Rs3,351.30 crore of debt securities were sold, according to data released by the Securities and Exchange Board of India. Foreign investors on the other hand were net buyers of around Rs988.24 crore of Indian debt over the same period. The benchmark 10-year government bond yield rose by four basis points to 8.77% on 11 July 2014 from 8.73% on 9 July 2014. Was this due to heavy redemptions from debt mutual funds on account of the LTCG tax amendments?
Finance minister Arun Jaitley, in his maiden budget, announced that tax on debt mutual funds will be increased to 20% (from 10% earlier), as well as the holding period for classification as long term would be extended to 36 months from the earlier 12 months. This was an attempt to bring parity between different instruments.
Reports mention that the tax impact could result in huge outflows from debt mutual funds. The Association of Mutual Funds in India has written to the regulator and the finance ministry to ensure that none of the tax proposals are brought in force with retrospective effect which could lead to heavy redemptions. The FM has yesterday announced that he may consider imposing this next year instead of this year itself.
Commenting on the impact of this regulation, Mr Balasubramanian, CEO, Birla Sun Life Mutual Fund said, “I would assume that FMPs as an asset class would lose attraction for short term and will come largely on the longer term. So, anyone with money for this category would need to come in for three years.” Further, he mentioned that, “The increase in long-term capital gain tax for debt funds would encourage investors to come in longer term saving.”
Much of the mutual fund redemptions could be from corporate investors. Murthy Nagarajan, head- fixed income, Quantum AMC, mention that, “These norms are aimed at the corporate investors who used to invest for one year and avail of tax benefits by investing in a fixed maturity plan. The same corporate investors if they invest in bank deposits will pay at the highest marginal tax rates. The retail investors participation has been nominal in one year FMP’s. The idea is to pluck this tax arbitrage for corporates. Going forward, the FMP money maturity may be invested in liquid funds or in bank fixed deposits.”
Another issue with this regulation is its applicability. There has been no clear instruction on when would this tax norm be effective and would investors have to pay long term capital gains tax of 20% if they have redeemed their investment during the period between April 1, when the revised rate is proposed to take effect, and July 10, the date of its announcement. A clarification is said to be issued.
Similarly, the budget highlights mentions a line about ‘Uniform tax treatment for pension fund and mutual fund linked retirement plans’, however, the budget speech, and neither the finance bill mentions anything about taxation for mutual fund linked retirement plans.
Again the applicability of Section 80 CCD for private sector employees investing in a pension fund has been a much discussed issue. Industry experts have different views of the same. Some are saying the section was reworded to bring clarity and thus would have no implication for private sector employees who have claimed deduction under this section. Others have the view that, private sector employees, employed on or before 1 January 2004 would have wrongly claimed a tax deduction under this section.
The weaker the governance of a company, the faster its shares seem to be flying
According to reports, Dr Khemka, who dared to question the land deals of Robert Vadra and DLF, will be transferred to the Centre on deputation and his file is cleared by the PMO
Dr Ashok Khemka, the senior officer from the Indian Administrative Services (IAS), against whom the Bhupinder Singh Hooda government in Haryana had sought a probe by the Central Bureau of Investigation (CBI), will be transferred to Central government on deputation, says a report.
According to reports, the civil services board has approved the whistle-blower's deputation. “The Union Cabinet secretary has made a recommendation to the Prime Minister's Office (PMO) to transfer the 1991-batch IAS officer, from Haryana to the central government. The PMO has also cleared Ashok Khemka's name and the communication is being sent to the Haryana government,” a report from India Today says.
In January, the Haryana government had sought a CBI probe into Khemka's role in allotment of work for roofing sheets for warehouses.
In October 2012, Dr Khemka dared to question the land deals of Robert Vadra, Sonia Gandhi's son-in-law, with the powerful realty giant DLF, which magically transferred into humongous profits from Mr Vadra. He had cancelled the mutation of a Rs58-crore land deal between Vadra's company, Skylight Hospitality, and DLF.
Khemka had also ordered an inquiry into the undervaluation of land deals done in four districts in Haryana, adjoining New Delhi, by Vadra.
Both orders were passed by Khemka after he had been transferred as director-general, consolidation and inspector general, registration, by the state government.
When that happened, the Haryana government did not stop at mere transfer of Dr Khemka. It wanted to crush and victimise Dr Khemka. The Haryana chief minister served Dr Khemka a charge sheet for "having caused damage to the reputation of Robert Vadra and that of DLF," and also for "illegally" cancelling the land deal. It also started an investigation into Dr Khemka's role as the MD of Haryana Warehousing Corporation, designed to harass and intimidate him. In an unprecedented move, the state government has ordered an audit by State Auditor General targeted only at him.
Last week, the Haryana Principal Accountant General (PAG) audit has confirmed irregularities in the state warehousing godown fabrication tender allotment, which took place when Dr Khemka was the company's managing director.
The state administration was allegedly demanding a CBI probe.