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How Does Budget 2015 Affect Mutual Fund Investors?

The effective rate of Dividend Distribution Tax has increased from 20.47 percent to 20.92 percent due to an increase in surcharge. It affects only investors in dividend or dividend reinvestment options of funds.
Budget-2015

Some of you have written to us asking for an explanation of how your mutual fund investments will be affected by the 2015 budget.

The answer, fortunately, is - not much. There are only 2 announcements in the budget that directly impact investors in mutual funds:

#1: The effective rate of Dividend Distribution Tax has increased from 20.47 percent to 20.92 percent due to an increase in surcharge. It affects only investors in dividend or dividend reinvestment options of funds. (At Scripbox we had concluded that the dividend option is useful only in very specific circumstances and therefore only offer the growth option - so no impact to Scripbox investors at all.)

#2: There will be no capital gains tax when two mutual fund schemes merge. This is important because in the past mutual fund investors were penalised for no fault of their own when mutual fund schemes were consolidated. If you invested in an equity fund and 3 months later the AMC decided to merge the scheme you became liable for short term capital gains tax. This will now not happen and is important since the coming years are likely to see consolidation among mutual fund schemes.

However, there are other ways in which the Budget may impact your finances indirectly:

#1: Direct & Indirect Taxes

  • No changes in exemption limits or sec 80C deductions so your tax planning assumptions remain exactly the same as last year.
  • Increase in Service Tax and applicability to almost everything is like a cost increase of 2% for all services you buy. So transport, healthcare, restaurants will all get more expensive
  • The stated direction in reducing corporate income tax to 25% from 30% over 4 years could lead to higher profitability for companies which will reflect in the value of your equity assets.
  • TDS introduced for Recurring Deposits making them less attractive in comparison to a SIP in debt funds.Wealth tax abolished and replaced by an extra 2% surcharge on income above Rs 1 Cr
#2: Tax exemptions
  • The limit for health insurance premium to be exempted has increased from Rs 15,000 to Rs 25,000 (From Rs 20,000 to Rs 30,000 for senior citizens). This increased allowance for health insurance is a response both to increasing cost of health insurance and the need for higher adoption of health insurance.
  • Transport allowance limit doubled from Rs 800 to Rs 1600.
  • No tax on Interest earned on the Sukanya Smriddhi account
#3: Deterrents for black money generation
  • This could channel a large portion of wealth into productive assets and thereby help accelerate economic growth.
  • Heavy penalties including prison terms for untaxed overseas assets
  • Quoting of PAN number for all transactions greater than Rs 1 lakh
  • Ban on use of cash more than Rs 20,000 in property transactions
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