Union Budget 2025-26: AMFI proposes restoration of lower tax rates on capital gains, indexation benefits for debt mutual funds

The Association of Mutual Funds in India (AMFI) has released a document with several proposals for the upcoming Union Budget for the financial year 2025-26 from the mutual fund (MF) industry. Some of the major proposals made were the restoration of long-term indexation benefits for debt schemes, the launch of pension-specific MF schemes and the introduction of Debt-Linked Savings Schemes (DLSS), among many others.

Restoration of long-term indexation benefits for debt funds

Debt mutual funds invest in fixed-income securities like bonds and government securities. They are considered a safer option compared to equities as they offer more stable returns. Indexation benefits allow investors to adjust the purchase price of their investments for inflation when calculating capital gains, which can reduce their taxable gain adjusted with inflation, and investors are only taxed for real value gained rather than the nominal value. This can make debt funds more attractive for investors seeking long-term options.

Restore earlier tax rates on capital gains

The AMFI has requested that the increased tax rates on short-term and long-term capital gains be rolled back, which were raised to 20% and 12.5% from the earlier levels of 15% and 10%, respectively. The inflated rates discourage retail investors from investing confidently in MFs and from putting their savings into markets, the AMFI said.

Expanding equity-oriented funds to include Fund of Funds (FoFs)

A Fund of Funds (FoF) is a mutual fund that invests in a portfolio of other funds, instead of directly investing in stocks, bonds or other securities. The AMFI proposed including Fund of Funds (FoFs) that allocate at least 90% of their investments in equity-oriented funds under the equity-oriented category. Currently, equity-oriented fund definition does not include many equity-invested FoFs which results in higher taxation when compared to direct equity or equity-oriented funds. If accepted, it can establish tax parity and lead to wider participation by retail investors.

Introduction of Debt-Linked Savings Schemes (DLSS)

Debt-Linked Savings Scheme (DLSS) is a type of tax-saving investment tool that invests mainly in debt instruments like bonds, government securities or fixed-income securities. Introducing DLSS can be a safe fixed-income investment choice for retail investors in the country. This can reduce the dependency on banks for corporate financing and fuel economic growth.

Raising TDS threshold

AMFI has suggested that the threshold for withholding tax on income distribution by mutual funds be increased to ₹50,000 per annum from the current ₹5,000. This can ease compliance issues for both investors and fund operators. AMFI says that the current level affects small investors by resulting in unnecessary refunds and administrative hassles.

MFs as specified assets

AMFI is in favour of allowing mutual funds that invest in priority sectors, such as infrastructure, to be classified as specified assets under Section 54EC for capital gains tax exemptions. The MF body suggests that this move would direct gains from property sales into infrastructure development and reduce the government's borrowing load, along with offering investors the opportunity to earn market-linked returns.

Allow pension-oriented mutual fund schemes

AMFI proposed the introduction of pension-oriented mutual fund schemes (Mutual Fund Linked Retirement Scheme) registered by the Securities and Exchange Board of India (SEBI) with tax benefits similar to the ones for the National Pension Scheme (NPS) under Section 80CCD of the Income Tax Act. AMFI believes that these schemes can offer an alternative to traditional pension schemes, particularly benefitting unorganised sector workers.

Revisiting LTCG Tax on equity investments

The mutual fund body proposes a change in the Long-Term Capital Gains (LTCG) tax structure for equity investments. It recommends applying a 10% tax rate on gains from equity holdings held for 1 to 3 years and exempting gains from equity investments held for more than 3 years.

Relaxing ELSS investment rules

AMFI proposed removing that mandates ELSS investments be made in multiples of ₹500, and to allow any amount above ₹500. This will align ELSS investments with the modern and digitised investment landscape where fixed amounts are no longer relevant.

• A uniform 10% surcharge on TDS for dividends and capital gains from mutual fund units for Non-Resident Indians (NRIs)
• Simplification of offshore fund taxation managed by Indian Portfolio Managers
• Reversal of Input Credit under section 17(2) towards Capital Gain on MF Units
• Sale of MF units to not be classified as Exempt service liable for reversal under Rule 42 of CGST Rules
• Relaxation regarding TDS deduction for inoperative PAN cards for mutual funds