Indian Fund Of Fund Industry Receives Dividend Tax Boost

by Lorys Charalambous, Tax-News.com, Cyprus

23 August 2005

The Indian Ministry of Finance has agreed to amend taxation laws to allow funds of mutual funds to be exempt from dividend taxation, a move which has been welcomed by the nation's mutual fund industry.

Under the new rules, funds of funds which have over 50% of their assets invested in equity mutual funds will be treated as 'equity-oriented funds' and as such will not be required to pay the 12.5% dividend tax levied on debt-oriented mutual funds.

Funds of funds have grown enormously in popularity over the past couple of years by offering investors the chance to minimise risk by investing through a company which spreads investment assets across a range of managed funds, hence the term fund of funds. However, the uptake of these type of funds has been slow in India since their introduction two years ago.

Presently, Indian law stipulates that plain mutual funds which hold more than 50% of their assets invested in equities are categorised as 'equity-oriented funds' with the remaining termed 'debt-oriented'. Dividends declared by equity-oriented funds are tax-free in the hands of investor and there is also no dividend distribution tax applicable on these funds.

However, funds of funds are classified as debt-oriented funds and therefore do not qualify for exemption from dividend distribution tax.

The decision to free FoFs from dividend taxation has been welcomed by India's mutual fund industry:

"This has been our demand during the run up to the past two budgets. This would give a major boost to fund houses that are looking at setting up FoFs that investment more than half of their assets in equity funds," the Chairman of the Association of Mutual Funds of India (AMFI), Mr A.P. Kurien, told Business Line.

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