Budget 2025: AMFI calls for restoration of long-term indexation benefit for debt funds

The Budget 2023 discontinued the indexation provision for new investments prospectively from April 1, 2023, which clearly implied that all investments up to March 31, 2023 shall be permitted to avail indexation benefit. However, in July 2024 Budget the said indexation benefit was withdrawn retrospectively for all old long-term investments in debt funds made even prior to or upto March 31, 2023 also.

“It is our humble and a logical request to kindly revisit the withdrawal of indexation on long term debt investments and restore the status quo ante by amending the tax laws re-introducing the indexation benefit on long term capital gains from debt funds in respect of all investments in debt funds made up to March 31, 2023,” AMFI said in its proposal.

The restoration of indexation benefits will boost the confidence of retail investors in the debt market and help in the development of the economy.

To encourage retail participation in bond markets, the mutual fund body has requested that capital gains on redemption of units of debt oriented mutual funds held for more than one year should be taxed at the rate of 12.5 per cent, as applicable in respect of listed bonds.

Currently, debt mutual fund is considered as short-term capital asset irrespective of the holding period and are taxed at applicable rates.

In the Budget 2024, the short term capital gains tax was hiked from 15 per cent to 20 per cent, increasing tax liability by 30 per cent. The long term capital gains tax was raised from 10 per cent to 12.5 per cent, increasing tax liability by 25 per cent.

The mutual fund body, in its Budget 2025 proposal, has requested to reinstate the earlier capital gains taxation rates as the percentage of hike is large.

AMFI has also proposed that for mutual funds as an investor, the STT (Securities Transaction Tax) on futures and options should be reinstated to the earlier rates. In the last budget, the STT was increased in futures from 0.0125 per cent to 0.02 per cent, for options it was hiked from 0.0625 per cent to 0.1 per cent.

The mutual fund body has requested to amend the definition of equity oriented funds (EOFs) to include fund of funds (FOF) investing in equity oriented funds. A FOF scheme of a mutual fund scheme invests in the units of other mutual fund schemes.

Under current income tax regime, a FOF scheme is treated as an EOF only if a minimum of 90 per cent of the total proceeds of such fund is invested in the units of EOFs; and such EOFs also invest a minimum of 90 per cent of their total proceeds in the equity shares of domestic companies listed on a recognised stock exchange.

AMFI has suggested that the tax treatment for NPS and retirement/pension oriented schemes launched by mutual funds should be aligned by bringing the latter also under Sec. 80CCD of IT Act, 1961.

Currently, while NPS is eligible for tax exemptions under Section 80CCD, only a handful of mutual fund retirement benefit / pension schemes which have been specifically notified by CBDT (Central Board of Direct Taxes) qualify for tax benefit under Sec.80C.

AMFI has also proposed that mutual fund units, wherein the underlying investments are made in specified infrastructure sub-sector, be included in the list of the specified long-term assets qualifying for tax exemption on long term capital gains.

The mutual fund body has also recommended for a need to further simplify taxation provisions of offshore funds managed by Indian portfolio managers, increase in threshold limit of withholding tax (TDS) on income distribution by MF scheme, introduce debt linked savings scheme (DLSS) to help expand the domestic bond market and relaxation to the mutual funds in case of deduction of TDS for inoperative PAN (permanent account number) cases.