Ahead of the Union Budget, the Association of Mutual Funds in India (AMFI) has proposed that mutual fund schemes (whether equity or debt-oriented) wherein the underlying investments are made into specified ‘infrastructure sub-sector’, as notified by the Government of India, should be included in the list of specified long-term assets under Section 54EC. Such investments can have a lock-in period of three years to be eligible for exemption from long-term capital gains under Section 54EC, the mutual fund body said

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In 1996, Sections 54EA and 54EB were introduced under the Income Tax Act, 1961 that allowed capital gains tax exemption for investments in specified assets, including mutual fund units, with a view to channelize investment into priority sectors of the economy and to give impetus to the capital markets.

However, Section 54EA and 54EB were withdrawn in the Union Budget 2000-01 and a new Section 54EC was introduced, whereby tax exemption on long-term capital gains is allowed only if the gains are invested in specified long-term assets that are redeemable after three years, namely, the bonds issued by the NHAI & REC.

After withdrawal of Section 54EA and 54EB in 2000, the inflow of Long-Term Capital Gains from sale of property, which would have otherwise flowed into capital market has practically stopped.

It is proposed that, mutual fund units wherein the underlying investments are made into specified infrastructure sub-sector as may be notified by the Government of India, be also included in the list of the specified long-term assets under Section 54EC.

While the underlying investment could be made in securities in infrastructure sub-sector, the mutual fund itself could be equity-oriented scheme or debt-oriented scheme. Further, the aforesaid investment can have a lock in period of three years to be eligible for exemption under Section 54EC, AMFI said.

The government’s plans to significantly increase investment in the infrastructure space will require massive funding and the banks may not be equipped to fund such investments and bonds issued by REC or NHAI may be inadequate.

Investment in the specified mutual fund schemes can provide an alternative investment avenue in addition to existing options to the investors and also provide an option to earn market related returns.

It will also help ease the burden cost of borrowing for infrastructure funding on the government.

Tax benefit under Section 54 EC for investment in the specified mutual fund scheme will help channelize the gains from sale of immovable property into capital markets through mutual fund route and bring greater depth to capital markets, AMFI said.

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