Budget wishlist: Mutual fund industry seeks tax relief on debt schemes

Easing of taxation crucial for financialisation of savings, says Amfi

The mutual fund (MF) industry has reiterated its demands of tax relief for debt schemes and roll-back of hike in equity taxation in its proposals for the Budget 2025.

 

In April 2023, the government removed the indexation benefit for debt MF schemes. The gains are now taxed at the investor's slab rate irrespective of the holding period. Changes in Budget 2024 added to the taxation challenge for debt MF investors as investments that were made before April 2023 also lost the indexation advantage.

 

"We believe that applying the new tax rates on a retrospective basis can be detrimental to investor confidence and deter new investors from entering capital markets as well as the existing ones to make further investments," said the Association of Mutual Funds in India (Amfi).

 

 

The industry body has sought alignment of debt fund taxation with that of listed bonds.

 

"It is requested that capital gains on redemption of units of debt-oriented mutual funds held for more than 1 year should be taxed at the rate of 12.5 per cent, as applicable in respect of listed bonds," it said.

 

Amfi has also called upon the government to roll back the hike in equity MF taxation. In the 2024 Budget, the Centre raised the short term capital gains (STCG) tax on equities from 15 per cent to 20 per cent. The long term capital gains (LTCG) tax was hiked to 12.5 per cent from 10 per cent. The increase in taxation could hamper the ongoing financialisation of savings, it said.

 

The industry body also seeks cuts in securities transaction tax (STT), which was raised in the previous Budget. The hike in STT for futures and options largely impacts arbitrage and equity savings funds as their strategy involves hedging.

 

In another tax-related proposal, the industry has called for a change in the taxation of all fund-of-funds (FoF) investing in equity-oriented funds. Currently, FoFs must meet two conditions to qualify for equity taxation: investing at least 90 per cent of the corpus in equity schemes and ensuring that the schemes they invest in allocate a minimum of 90 per cent to domestic equities.

 

According to Amfi, most FoFs fail to qualify for equity taxation due to the second condition. It noted that since equity schemes have the flexibility to invest between 65 per cent and 100 per cent in equities, this creates a hurdle in meeting the second condition.

 

Amfi has also proposed that the government allow all MFs to launch pension-oriented MF schemes with uniform tax treatment as the National Pension System (NPS). It argued that while there are three broad investment avenues for post-retirement pension income — NPS, retirement MF schemes, and insurance-linked pension plans — only NPS is eligible for tax exemptions under Section 80CCD.