At a time when the real estate sector is hard-pressed for funds, the real estate mutual funds (REMFs) are yet to take off, in spite of being granted permission 3 months ago. This is due to unclear rules about their tax treatment.
REMFs, which were touted as key instrument enabling retail investors to take part in the booming realty sector, have been delayed partly because the Securities & Exchange Board of India (Sebi) and the finance ministry are still trying to sort out the tax ability of such scheme.
The Central Board of Direct Taxes (CBDT) has decided to provide it the same tax status as the equity oriented mutual funds, as was requested by the Sebi. This means that the REMFs will be freed from dividend distribution tax and investors spared from paying long-term capital gains while selling their shares.
Yet, as said by the Income Tax Act 1961, equity oriented mutual funds are those which have at least sixty five percent direct investment in securities of the listed companies.
Interestingly, in Sebi’s rules, REMFs must invest a at least of thirty five percent of their funds straight into real estate assets and the rest into mortgage-backed securities, debt and equity instruments floated by the realty companies, thereby making it hard for them to be eligible as equity oriented mutual funds.
“As per the REMF structure laid out by Sebi, these funds would more often than not be akin to debt funds,” an expert said. Unlike equity-linked funds, debt-funds magnetize both capital gains tax and dividend distribution tax. This creates problems as investors are indirectly being denied the tax incentives given to equity oriented funds, the officials said.
“For a clearer understanding and in order to take in REMFs, the finance ministry will have to change the description of equity oriented mutual funds in the IT Act,” A. Krishnan tax partner (real estate), Ernst & Young said.