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Tax sops to tap disinvestment through Exchange Traded Funds, Fund of Funds routes

At present, investments in ELSS of mutual funds are eligible for tax deduction on investment up to Rs 1.50 lakh per annum under Section 80 C of the Income Tax Act.

Published: 08th July 2019 08:23 AM  |   Last Updated: 08th July 2019 08:23 AM   |  A+A-

ETF funds, Exchange Traded Fund

Representational image

Express News Service

MUMBAI: Having tasted huge success with two rounds of disinvestments through CPSE-ETF (Central Public Sector Enterprises-Exchange Traded Fund) and Bharat ETF last financial year, the Central government has come up with a few tax concessions to make them a little more attractive for retail investors.

In her recent Budget proposal, Finance Minister Nirmala Sitharaman announced that investment in CPSEs would get benefits on par with what Equity Linked Saving Schemes (ELSS) get at present. These ETFs are passively managed funds and offer low-cost investment options to investors.

At present, investments in ELSS of mutual funds are eligible for a tax deduction on investment up to Rs 1.50 lakh per annum under Section 80 C of the Income Tax Act. “ETFs have proved to be an important investment opportunity for retail investors and have turned out to be a good instrument for Government of India’s divestment programme. To expand this further, the government will offer an investment option in ETFs on the lines of Equity-Linked Saving Schemes. This would also encourage long-term investment in CPSEs,” Sitharaman said in the Budget speech.

Last year, the biggest disinvestment receipt (of Rs 17,000 crore) came from the CPSE Further Fund Offer (FFO) 3 in November; and FFO 4 in March brought in Rs 9,350.07 crore. Bharat ETF, which also has three private firms from the SUUTI holding, raised Rs 8,325.26 and Rs 10,404.59 crore respectively. However, before jumping in, investors need to weigh the returns vis-a-vis the ELSS schemes and also wait for further details to emerge. For instance, ELSS carries a three-year lock-in period; it is still not clear whether it would be applicable for the ETF investments as well.

“While this definitely makes investing in government-owned enterprises more attractive, as usual, the investor will still need to make sure to evaluate all available options before investing. With so many existing options covered under Section 80C, it may not lead to significant flows in these ETFs either. Hopefully, going forward, the government will support retail investors by increasing the deduction limit under Section 80C,” said Gautam Kalia, head (investment solutions), Sharekhan by BNP Paribas.

Besides, the Budget has also proposed to provide a concessional rate of short-term capital gains tax at 15 per cent to Fund of Funds (FoF) set up for CPSE disinvestment; the concessional rate of long-term capital gains tax of the same has already been extended. FoFs are where the money is invested in other mutual fund schemes, and not directly into equities or debt securities. At present, there is no CPSE FoF category, and the taxation benefits introduced in the Finance Bill perhaps is a precursor for its launch.

The Department of Investment and Public Asset Management had made it clear that it would like to use the ETF route for disinvestment; and that from equities, this would also be used in mobilising debt, as announced in the Budget last year. This year’s disinvestment target has also been pegged higher at Rs 1.05 lakh crore, compared to Rs 80,000 crore last year.

What is proposed

  • Currently, investments in ELSS of mutual funds are eligible for a tax deduction on investment up to I1.50 lakh per annum
  • The Budget proposes tax benefits for investment in CPSEs, on par with benefits for investments in ELSS under Section 80 of the I-T Act
  • It also proposes to provide a concessional rate of short-term capital gains tax at 15% to Fund of Funds set up for CPSE disinvestment
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