Why Tax Rules on Pooled Schemes Need an Overhaul

Aligning all schemes with investor-level tax may simplify system, reduce tax arbitrage

- GAUTAM NAYAK

India offers a range of collective investment schemes — mutual funds (MFs), unit-linked insurance plans (ULIPs), real estate and infrastructure investment trusts (REITs and InvITs), alternate investment funds (AIFs), and portfolio management schemes (PMS). While all pool investor money and are regulated by SEBI, they follow different rules and face widely varying tax treatment. This fragmented regime enables tax arbitrage, allowing investors to choose structures that offer better tax outcomes for similar investments.

Some gaps — like dividend stripping and debt fund gains — have been addressed. But a key question remains: should tax differ based only on product structure? Despite steps to rationalize capital gains tax, a unified tax framework for all the investment schemes is still missing.

MFs and ULIPs: Both are treated as standalone investment products, and income generated within the schemes is not taxed at the fund level on a pass-through basis. For MFs, any income distributed (like dividends) is taxed as income from other sources, while gains made on selling MF units are taxed as capital gains.