New tax code means bad news for the mutual fund industry

The new tax code proposed by the Finance Ministry would lead to withdrawal of several tax-benefits currently on offer to mutual fund investors. This may mean bad news for the asset management companies, since fewer people may be interested to invest in mutual funds now.

1. No more tax-savings through ELSS: The new tax code does not list Equity-linked savings scheme ( commonly known as tax-savings mutual funds ) in section 66 ( the replacement of section 80c ). This means that ELSS would no longer be tax-savings instruments under the new tax regime.

2. Pay tax on dividends: The dividends paid by mutual funds ( even, equity mutual funds ) would be taxable in the hands of the investors under the proposed law.

3. Capital gains are taxed: Previously investors in equity mutual funds used to benefit from tax-free long term capital gains ( holding period more than a year ). Debt fund investors also used to pay long-term capital gains tax at a lower rate than the personal income tax rate. Now capital gains will be clubbed to your income and taxed as per the applicable tax rates of income tax. For holding period greater than a year the capital gains can be adjusted for the cost of inflation.

4. Pay tax even on Switch: Previously, investors in equity schemes could easily switch over to other schemes after one year without any tax-liability. This was widely recommended by financial advisors as part of portfolio re-allocation or when the investor is nearing his goals like "buying a house". But the new tax code proposes to tax all gains hence any switch between mutual funds will also be taxed since a mutual fund switch is technically nothing but a redemption followed by a purchase into the fund you wish to enter.