Consider these 9 things before investing in mutual funds!

Many investors keenly follow the Union budget, but this year the interest will be greater than usual. There are hopes that finance minister Nirmala Sitharaman will introduce measures to revive the economy.  Further, investors are also hoping that some of the investor-unfriendly measures introduced in the past few years will be rolled back. Here are some proposals that can help boost investor confidence.

 Long-term capital gains (LTCG) from equity instruments were tax free till three years ago, but made taxable @10% beyond Rs 1 lakh. In a relief for equity investors, LTCG may be completely removed or at least the threshold increased to Rs 3 Lakh.

As a quid pro quo, the minimum holding period for long-term gains can be extended from one year to two years. Further, those long-term investors who don’t claim exemption every year, should be allowed to carry forward the unclaimed exemption for up to five financial years.

We often advise mutual fund investors to switch from poorly performing schemes to better schemes or funds, but such switching is taxed. There is no tax, however, when an investor switches from one fund to another in a ULIP, a pension plan or the NPS.

Similarly, if debt funds and conservative hybrid funds are sold before three years, the gains are added to the investor’s taxable income and taxed according to the slab rate. After three years, the gains are taxed at 20% after indexation. For equity funds or aggressive hybrid funds, short-term gains are taxed at 15%. After one year, gains of up to Rs 1 lakh are tax free and beyond that are taxed at 10%.

Gains from switching should not be taxed. This relief will provide a level playing field to mutual fund investors and boost investment activity.

 There are some other anomalies in the way different investments are taxed. The holding period to calculate LTCG should be made uniform. At present, for stocks it is one year, for realty it is two and for gold ornaments and debt fund it is three. Even the tax treatment is different. LTCG tax on gold ornaments, bars, coins and gold funds is 20% with indexation, while gold bonds held till maturity are tax free. Even if these bonds are sold before maturity, the tax is only 10%. The budget should remove these complications and rationalise the capital gains tax structure.

In conclusion, removing (double) taxation on dividends and reducing anomalies on holding period and/or tax rates will go a long way in instilling more confidence in the investing community and in generally lifting the market sentiment.