LTCG indexation for debt mutual funds in Budget 2026: What to expect from FM Sitharaman

In 2023, the government removed the long-term capital gains (LTCG) benefit with indexation for most debt mutual funds. Then, in Budget 2024, rules around capital gains tax, indexation, and securities transaction tax (STT) were further revised.

As a result, most gains from debt funds are now taxed at the investor’s regular income tax slab, regardless of how long the investment is held.

Industry body AMFI (Association of Mutual Funds in India) argues that this has discouraged conservative investors, particularly senior citizens, who rely on debt funds for stable income. They point out that the withdrawal of the LTCG indexation benefit has contributed to a noticeable drop in net inflows into debt funds over the past three years.

What AMFI is proposing:

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

• Tax rate: 12.5% (or 20% with indexation).

• Amend relevant sections of the Income Tax Act and Bill (Sections 2, 48, 50AA, 112 of the Act; Sections 2, 72, 76, 197 of the Bill).

Why it matters to investors:

• Boosts post-tax returns on debt funds, making them more attractive compared to other long-term assets.

• Channels retirement savings into corporate bonds, helping retirees and senior citizens secure a reliable income.

• Supports a vibrant corporate bond market, providing companies and the government with more funding flexibility.

• Encourages long-term fixed-income saving and promotes greater financialization of household savings, which can fuel India’s economic growth.

AMFI emphasises that debt remains a critical investment class for risk-averse investors and retirees.