Budget Expectations: Mutual fund industry seeks lower entry value for ELSS, LTCG benefit for debt schemes

As part of its suggestions related to fixed income, the industry body urged to restore the long-term indexation benefit for debt schemes of mutual funds which was withdrawn in Budget 2024.

It said that post Finance Act 2023, most debt MF gains are taxed at slab rates regardless of holding period basis section 50AA of the Income-tax Act, 1961. This has led to sharp reduction of net inflows into the debt mutual funds over the last three years.

“Restore long‑term capital gains (LTCG) with indexation for debt mutual funds held over 36 months by amending Sections 2, 48, 50AA and 112 of the Act (Section 2, 72, 76 and 197 of the Bill),” the industry body said in its proposal.

It recommended that the definition of ‘Equity Oriented Funds’ be revised to include investment in Fund of Funds schemes which invests a minimum of 90 per cent of the corpus in units of equity oriented mutual fund schemes, which in turn invest minimum 65 per cent in equity shares of domestic companies listed on a recognised stock exchange.

AMFI said it has suggested that the LTCG on listed equity shares or units of equity-oriented fund schemes held for more than one year and up to three years should be subjected to LTCG tax of 12.5 per cent (plus applicable surcharge and cess) on the capital gains exceeding Rs 2 lakh in a financial year. For schemes held more than three years, it has recommended exemption from capital gains tax years.

The industry body has sought an amendment to ELSS Rule 3A so as to permit any amount to be invested in the scheme, instead of in multiples of Rs 500

“Provide a separate deduction (on the lines of Section 80CCD(1B) of the Act (Section 124 of the Bill)) exclusively for ELSS investments under the new tax regime, with a notified cap,” the mutual fund body proposed.

It has sought parity in tax treatment in respect of intra-scheme switching of units under mutual fund schemes.

“It is proposed that intra-scheme switches, i.e., switching of investment within the same mutual fund scheme is not regarded as a “Transfer” under section 47 of the Act (Section 70 of the Bill) and the same should be exempt from payment of capital gains tax,” AMFI said in its proposal.

In order to increase retail participation in the corporate bond market, AMFI has proposed to introduce Debt Linked Savings Scheme (DLSS).