Will Budget 2025 restore indexation benefits on old debt fund investments? AMFI weighs in

Budget 2025 expectations: The Association of Mutual Funds in India (AMFI) expects Finance Minister Niramala Sitharaman to restore the indexation benefit on long-term capital gains from investments in debt mutual funds made up to March 31, 2024.

As per section 50AA of the Income Tax Act, 1961, a mutual fund scheme having over 65% of its portfolio holdings in debt and money market instruments such as debentures, State Development Loans (SDLs), and government securities are classified as debt funds.

History of debt-fund taxation

Indexation benefit was available before Budget 2023 for investments in debt funds held for over three years. It helps reduce the impact of inflation on capital gains from an asset.

Budget 2023 discontinued the indexation provision for new investments in debt funds from April 1, 2023. At that time, it was believed that all investments in debt funds made up to March 31, 2023, would qualify for the indexation benefit.

Why should the govt restore indexation benefits?

The current tax rules make returns from debt funds almost insignificant.

Consider this: debt funds have given returns of around 7% in the last three years while inflation has hovered around 5.5% in this duration. This means the real income earned by debt fund investors is only 1.5%. This reduces further for an investor after applying taxes at slab rates.

Budget 2024 first announced the removal of indexation benefits on all assets, including real estate. The government revised this decision later, allowing the option of availing the indexation benefit on capital gains from property purchased before July 1, 2024. However, a similar relief was not provided to debt fund investors.

“Unfortunately, a similar relief that ought to have been rightfully extended to debt funds investors was overlooked, which was perhaps unintentional," said AMFI.

“Restoring the indexation benefit on long-term capital gains from Debt Funds will boost the confidence of retail investors in the debt market and help in the development of the Indian economy,” it added.