Domestic mutual fund companies have resumed accepting lump sum contributions to their international equity plans after the latest Finance Bill eliminated tax breaks for debt-oriented savings plans beginning April 1. Onshore plans that invest in foreign markets are taxed as debt funds in their home country.
At least three asset management companies (AMCs) have opened 16 international equity mutual fund programmes for lump-sum investments up to the legal limit. The Finance Bill amendments, which take effect on April 1, will eliminate indexation benefits for debt-oriented savings plans.
Edelweiss Mutual Fund has opened seven of its international funds for lump-sum subscription and switch-in transactions from March 27, while Mirae has opened six such plans and Franklin Templeton three. Other fund houses that have continued to accept investments without restrictions include DSP Mutual Fund, Motilal Oswal Mutual Fund, Axis MF, Nippon India AMC, and ICICI Prudential Mutual Fund.
We see this as an excellent opportunity to capitalise on market corrections and want to provide investors with the opportunity to benefit from tax advantages by investing before March 31," said Radhika Gupta, MD and CEO of Edelweiss AMC.
Some of these asset managers suspended new investments in these mutual funds in February 2022 as the amounts approached the overseas investment limits. The total limit for mutual fund overseas investments is $7 billion, with an additional $1 billion allowed for exchange traded funds, or ETFs.
This window allows investors to deploy funds before March 31 in order to benefit from indexation benefits. For investments in these products made before March 31 and held for more than three years, investors must pay a 20% long-term capital gains tax with indexation, which can significantly reduce tax liability.
Capital gains from investments in debt mutual fund plans will be added to the saver's taxable income beginning April 1, and the gains will be taxed at the income tax slab rate.
Over the weekend, mutual funds were seen nudging investors to put money in their debt plans before March 31.
"Valuations in the US markets have cooled off; so if you are looking to make an investment in the next few days, it is better to do it now as you get the additional benefit of taxation," said Nirav Karkera, Fisdom's research head.
Analysts and financial planners warn investors against going overboard in order to benefit from lower taxes.
"Investors should allocate 10-15% of their portfolios to international funds in order to diversify their equity portfolio and gain access to niche businesses that are not available in India," Karkera said.
He suggests investing in the Nasdaq 100 fund, which has lost 7.5% in the last year, and the S&P 500 broad-based index, which has lost 3.6% in the last year.
Financial planners believe retail investors who have started their investment journey should first build their Indian portfolios and not get into this rush.
"Retail investors with small portfolios and not in high tax brackets need not rush to make an overseas investment," said Nikhil Gupta, Founder, Sage Capital.