Budget 2025: Why MF industry's top wish is tax relief for debt funds

The industry seeks a 12.5 tax rate on long-term capital gains (LTCG) for redeeming debt mutual fund units held over a year, aligning it with the rate applicable to listed bonds

The Association of Mutual Funds in India (AMFI) has released a 15-point proposal for the Union Budget for the financial year 2025-26. It includes requests for the restoration of the long-term indexation benefit for debt schemes, which was removed in the Budget 2024, reinstatement of earlier tax rates on capital gains, and amendment of the definition of equity oriented funds to include fund of funds investing in equity overseas funds.

 

One of the mutual fund industry’s biggest expectation for Union Budget 2025 is the return of tax relief for debt funds, especially the reintroduction of indexation benefits. Let us understand why the mutual fund industry’s top wish is tax relief for debt funds.

 

 

The industry body said, “Indexation is not a tax waiver but a neutraliser to the impact of inflation. The removal of indexation benefit will have a material impact on Debt Mutual Fund investors. It may be noted that the debt mutual fund investors are anyway getting taxed at a marginal rate since April 1, 2023 which has already hurt them significantly.”

 

Before Budget 2023, these benefits played a key role in reducing the impact of inflation on capital gains.

 

“This removal along with the retrospective withdrawal for investments made before March 31, 2023, has discouraged many investors and reduced participation in debt funds as a category. Apart from this, treating gains from debt funds as short-term, regardless of the holding period, has also made them less tax-efficient compared to other investment options,” said Shweta Rajani, head - Mutual Funds, Anand Rathi Wealth Limited.

 

“To unlock the full potential of India’s debt capital markets, the upcoming budget must prioritise making debt funds more attractive through favourable taxation policies. A robust debt market will enhance liquidity, provide companies with better cost of capital, and enable them to undertake capex with a healthy mix of debt and equity, driving long-term growth and financial stability,” said Rahul Bhutoria, director and founder Valtrust.

 

“Restoring indexation benefits and reintroducing the short term and long term taxation would not only make debt funds more attractive to retail investors but also encourage long-term savings,” Rajani said.

 

When it comes to other demands from the mutual fund industry, they are asking all mutual funds should be allowed to launch pension-oriented MF schemes (MFLRS) with Uniform Tax Treatment as NPS.

 

“Allowing mutual funds to launch Mutual Fund Linked Retirement Plans (MFLRP) would bring pension benefits to millions of Indians in the unorganised sector...A long-term product like MFLRS can play a catalytical role in channelising household savings into securities market and bring greater depth,” the industry body stated.

 

“Mutual funds play a significant part in supporting infrastructure financing and facilitating the transmission of monetary policy changes. Aligning tax incentives would not only level the playing field but also bolster the corporate bond market and enhance investor confidence. Similarly, extending the tax benefits of NPS to mutual funds, especially for pension-oriented schemes, would streamline the system and reinforce the mutual fund industry's role as a cornerstone of long-term investment planning,” said Mahendra Kumar Jajoo, chief investment officer - Fixed Income, Mirae Asset Investment Managers (India).