The government may exempt investments in asset reconstruction companies from income tax in the forthcoming Budget to boost the bad assets recovery business.

At present, the Income Tax Act does not recognise the pass-through nature of the trusts set up by such companies for acquisition, management and resolution of non-performing assets in accordance with the Sarfaesi Act and RBI guidelines.

The banking industry feels that ARCs play an important role in adding value to the impaired assets of banks by helping fast recovery of the non-performing assets.

It is not possible every time for the ARCs to take debt or equity route to raise funds to purchase the impaired assets. Issuing of security receipts thus becomes a logical option.

"Therefore the ministry may think of giving it the same status as mutual funds which are exempt from tax under Section 10 (23) (D) of the Income Tax Act," said a source.

Under the Section, while computing the total income of any person, income from any mutual fund registered under the Securities and Exchange Board of India Act, 1992, is not included.

This income tax benefit on the individual incomes attract investment in this sector. So, investors in securities of ARCs should also be exempted to make it an attractive investment option, the source said.

The ministry is also likely to consider giving tax deductions to banks on the investments made to set up ARCs, under Section 36 of the Income Tax Act.

A number of deductions under Section 36 are allowed while computing income from profits and gains of business.