Budget 2026 income tax changes: AMFI seeks relief on capital gains, debt funds, retirement savings

In its pre-Budget submission, the Association of Mutual Funds in India (AMFI) has flagged several tax and operational issues that, it says, are discouraging long-term investing and hurting household participation in capital markets.

1. Debt mutual funds: Indexation benefit

Most debt mutual fund gains are taxed at the investor’s income tax slab rate, irrespective of holding period. Long-term capital gains with indexation were withdrawn in 2023

Restore LTCG with indexation for debt mutual funds held for more than 36 months

Tax rate of 12.5% (or 20% with indexation)

2. New debt linked savings scheme (DLSS)

No dedicated tax-saving product exists for long-term debt investments. Section 80C is crowded and largely equity- and provident-fund focused.

Introduce a DLSS with:

• 5-year lock-in

• Minimum 80% investment in high-quality debt

• Separate tax deduction outside Section 80C

3. Equity capital gains tax

LTCG on equity mutual funds is taxed at 12.5%. Exemption available only up to ₹1.25 lakh per financial year

Increase the tax-free LTCG limit to ₹2 lakh. Exempt LTCG on equity mutual funds held for more than 5 years

4. Equity Fund-of-Funds (FoFs) tax treatment

Equity FoFs are taxed as non-equity funds, even if they invest primarily in equity mutual funds.This results in higher tax outgo for investors

Treat FoFs investing 90% or more in equity-oriented funds as equity funds

Clarify the law to allow FoFs to invest in multiple equity schemes

5. ELSS: Investment and tax incentives

ELSS investments must be in multiples of ₹500. There is no separate tax benefit for ELSS under the new tax regime

• Allow ELSS investments in any amount, subject to a minimum

• Provide a separate deduction for ELSS under the new tax regime

6. Retirement-focused mutual fund products

Tax incentives for retirement savings are largely limited to EPF and NPS. Mutual funds lack a dedicated, tax-efficient retirement vehicle

• Allow mutual funds to launch pension-oriented schemes with NPS-like tax benefits

• Introduce Mutual Fund Linked Retirement Schemes (MFLRS) with EEE tax treatment

• Create a voluntary MF voluntary retirement account (MF-VRA), similar to US 401(k) plans

7. Intra-scheme switching

Switching between Growth and IDCW options or direct and regular plans is treated as a transfer. Capital gains tax applies even though the underlying portfolio remains the same

Exempt intra-scheme switches from capital gains tax

8. Mutual fund dividends and TDS

TDS deducted on dividend income exceeding ₹10,000 per year

Increase TDS threshold to ₹50,000 annually

9. NRI investors: TDS and surcharge

• Surcharge on TDS for NRIs varies based on income slabs

• Mutual funds often deduct a higher surcharge to avoid compliance risk

Prescribe a flat 10% surcharge on TDS for NRIs