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.
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Even before the globally-popular real estate mutual funds (REMF) take off here, RBI has raised a red flag. It has argued that the funds would lead to circumvention of foreign direct investment (FDI) in real estate that places restrictions on foreign investors. Although 100% FDI is allowed in realty projects on the automatic route, the conditions have to be adhered to. The banking regulator has said it amounted to indirect flow of FDI in violation of the spirit of the conditions laid down by the government. RBI now wants the government to take up the issue with market regulator Sebi which had issued the guidelines on REMFs about two months ago. As per the Sebi guidelines, REMFs can directly invest in real estate, in mortgage-backed securities, securities of companies engaged in dealing in real estate assets or in undertaking real estate development projects and other securities. However, it has mandated that at least 35% of net assets of the scheme should be invested directly in realty assets. The much-awaited scheme has not found takers but some fund houses are working on the scheme. RBI’s concerns about flow of foreign investment in realty are not new. It had earlier written to the government to make Foreign Investment Promotion Board’s clearance mandatory for FDI into the sector.For more view- realtydigest.blogspot.com