The Association of Mutual Funds (AMFI) has requested restoration of long-term capital gains tax with indexation benefit to encourage longer-term participation in debt mutual funds. Following the removal of indexation benefits in 2023, gains from debt funds are now taxed at the investor's marginal income tax rate, placing them at a considerable disadvantage compared to equity funds which still enjoy a more favorable long-term capital gains tax structure. This tax rationalisation would revive the category of safer investments compared to equity assets, which have higher risk profiles, and would be seen as a major positive for Asset Management Companies (AMCs) and the overall mutual fund industry. According to CNBCTV18, experts are calling for simplified and progressive personal tax slabs and enhanced deductions for housing, savings and insurance to support domestic market participation.
The mutual fund industry has proposed a 12.5% capital gains tax for funds redeemed between 1-3 years, with exemption for investments held for more than 5 years. As reported by Mint, AMFI has officially requested to enhance the capital gains threshold from ₹1.25 lakh to ₹2 lakh. The industry argues that current taxation rates of 12-24 months are reducing investor stickiness, as most investors redeem after these periods due to standard tax rates post holding periods. Additionally, investors are closely watching for potential changes in capital gains taxation, with a key demand to increase the tax-free limit for Long-Term Capital Gains (LTCG) on equities from ₹1.25 lakh to ₹2 lakh, which would encourage more retail participation and promote long-term investment in the stock market. CNBCTV18 reports that experts are flagging the need to strengthen deductions and benefits linked to housing, retirement and medical costs, with calls for higher home loan interest deduction from ₹2 lakh to ₹3 lakh and increased NPS deduction from ₹50,000 to ₹1 lakh.
The mutual fund industry has requested introduction of fresh Debt-Linked Savings Scheme (DLSS) with 5-year lock-in and separate deduction beyond Section 80C limits. According to Mint reports, AMFI has also proposed an additional mutual fund voluntary retirement scheme (MF-VRA) for social security benefits, which would invest according to individual lifecycle requirements and be linked to employer-associated retirement benefits. The industry seeks additional tax deductions to incentivize contributions to MF-VRA accounts. The reintroduction of indexation benefits for debt mutual funds is another critical expectation that would level the playing field between asset classes and boost inflows into debt funds. CNBCTV18 reports that experts are emphasizing the need for simplifying the tax treatment across different asset classes to reduce the 'tax complexity' that often scares away small-town investors.
Fund houses face technical challenges with ₹500 multiples in ELSS investments, where investors aren't aware of these limits and some mutual funds must reject applications or partially refund excess amounts. As reported by Mint, the industry body has requested that investments in Equity Linked Savings Scheme be permitted of any amount, subject to a minimum of ₹500. Additionally, the association has demanded extension of TDS threshold for income distribution to ₹50,000 from ₹10,000. CNBCTV18 reports that tax professionals are seeking rationalisation of TDS and TCS rates to reduce compliance friction and improve cash flows, with calls for clear guidance on anti-avoidance provisions and fast-track demergers.
The industry faces challenges with the $7 billion investment window limit set by the Reserve Bank of India, frequently causing fund houses to pause international stock market investments. According to Mint reports, Aditya Agarwal of Wealthy.in suggests expansion of the overseas investment window to help individuals diversify geographical risk. The association has also demanded uniform 10% surcharge rate on TDS for NRIs instead of slab-wise rates, and capping surcharge at 15% for mutual fund income distribution to bring parity with corporate dividends. The budget is also expected to address the specific needs of various sectors, with the startup ecosystem seeking rationalization of LTCG on unlisted shares and simplified compliance for Alternative Investment Funds (AIFs) to improve capital flow.