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DFDA writes to Mr. Jayant Sinha, MoS Finance

DFDA, New Delhi

1st February 2016

In a nutshell

DFDA - North India's most influential distributor group, has offered 11 suggestions to Mr. Jayant Sinha, Minister of State, Finance, for efficiently channelizing household savings to boost economic growth

The suggestion on exempting education savings from tax and the structuring of this product to ensure proper end use of funds is particularly noteworthy, and one which deserves the support of AMFI and SEBI, both of whom will be making their independent pre-Budget recommendations anyway to the Ministry.

Reproduced below is the full text of DFDA's memorandum to Mr. Sinha

ECONOMIC GROWTH THROUGH CAPITAL MARKET INVESTMENTS

SUGGESTIONS TO CHANNELIZE HOUSEHOLD SAVINGS INTO THE CAPITAL MARKETS

Economic growth in a Country depends on an efficient financial sector that pools domestic savings for productive investments and without a vibrant capital market, productive projects and investments may remain unexploited whether it is government companies looking to raise capital through bonds and equities, or big well known companies or even relatively new companies as they can raise Long term capital efficiently at a lower cost if there is a participation from large number of investors.

In the past there have been many initiatives from the government and SEBI for improvement of capital Markets like Electronic Trading Systems, Dematerialization of stocks and bonds, settlement guarantee, which have gone a long way in making an efficient price discovery and eliminating systemic risk from the market. Promotion of Mutual Funds have also offered financial solutions to Retail, HNI and Corporate Investors. Inspite of all the above steps the investment of Indian household is less than 5% of their total savings in the Indian Capital Markets.

Meanwhile the Domestic Savings rate is also coming down creating further pressure on Investments and Capital Formation and now the government is being asked by experts to do more investments without bothering about Fiscal Deficit to boost growth in the economy.

The Capital markets have been successful in keeping investors to the extent possible, away from non- productive physical assets, even as during the past ten years, the older well established products have been phased out, most common being RBI Tax- free bonds, Infrastructure Bonds etc. The objectives have remained the same, that is to provide regulated products to the investors so that Ponzi Schemes do not grow, promote domestic savings and channelization of savings into productive assets.

During the calendar year 2015, Domestic money (mainly through Mutual Funds) has been successfully filling the gap created by pulling out of FII money, and further outflows cannot also be ruled out. We need to create an environment in which household savings are channelized in productive Assets though Capital Markets.

Distribution is a key constituent of savings and Investment Eco system in India, and to give a boost to household savings coming to Capital Market and thereby boost economic activity in the country resulting in higher growth, we would like to give the following suggestions: -

1. There should also be a single digital KYC for all financial instruments.

2. Besides, the government should form a self regulatory organization of distributors and set a target of creating 1 million financial distributors in the next one year under the "Skill India" campaign.

3. Education

Exempt education savings from tax.

Children's education is an important goal for Indian Parents. While tuition fees gets a deduction, long term savings for education should also get tax benefits. Just like the 529 investment plans in the US, there should be child education funds that offer tax deductions on the contribution. To ensure that the corpus is not used for other goals, SEBI can ensure that the fund house makes the payment directly to the educational institute in which the child takes admission. Regular/ other withdrawals should be made taxable and cash upto desired limits should be permitted 10-15 Years long term money can come from common man.



4. Include Mutual Funds in Section 54EC

At present, Section 54EC of the Income Tax Act lists the cases in which capital gains tax from long- term assets (held for more than three years) need not be charged, if the gains are invested in certain specified areas.

Currently , mutual fund are not included among these specified assets, that include bonds issued by National Highways Authority of India, Rural Electrification Corporation, etc.

This will allow the flow of long term money in the industry wherein open end equity funds would have subscriptions locked in for a reasonably long period of time.

5. The 65% minimum limit of investment in Indian Equities for getting the scheme classified as an equity fund, for tax purposes, should be reduced to 40%. This will go a long way in acceptability of mutual funds among the general investors, who are generally risk averse.

6. Make Debt Fund dividends tax- free:

Retail Investors would get more legroom if dividends from Debt Funds were made tax- free up to an investment amount of Rs 2 Lacs. While dividends are not taxed for Equity Schemes, they are taxed in Debt Funds through a dividend distribution tax.



7. Ceiling of Rs. 1.5 Lacs should be raised to Rs. 2.5 Lacs and all eligible investments under this Section 80C

8. Deduction under Sec 80CCF should be re-introduced for investment in infrastructure bonds up to Rs. 50000/-.

9. A VDIS scheme can be planned wherein people can invest cash in specified funds with 10 Year lock in and pay tax on gains at the time of withdrawal.

10. AIR of Rs. 2 Lacs in Mutual fund should be removed.

11. Increase tax break cap to 5 Years.

"If under - construction properties are not delivered within 3 Years, home buyers cannot claim deduction for interest on housing loan beyond Rs. 30000/-.

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