The exemption from the 12.5 per cent dividend tax for investors in equity-oriented mutual funds, which lapsed on March 31, is likely to be restored in the Budget.

The ousted National Democratic Alliance government had exempted from tax at the hands of investors the dividend income from equity schemes in the Budget for 2003-04.

The exemption was applicable till March 31, and the government could not extend the period as there was no full-fledged budget in February 2004.

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Since the time has elapsed, the tax exemption is likely to be reinstated for this fiscal, official sources said in New Delhi on Tuesday.

The move assumes significance for investors in the Rs 140,000 crore (Rs 1,400 billion) mutual fund industry, who are looking for the exemption as a major incentive for investing in capital market through funds.

The mutual fund industry had asked the Finance Minister P Chidambaram to exempt capital gains if it came from equity schemes.

Association of Mutual Fund of India officials met Chidambaram to impress upon him the need to exempt dividend income from tax in the interest of the healthy growth of the capital markets.

There has been assurance in the Common Minimum Programme that the Congress-led coalition government was committed to orderly and healthy growth in capital markets and protection of the interest of small investors.