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In its budget proposal to the Union Finance Ministry, AMFI has requested the finance minister to reintroduce tax exemption in equity mutual funds. It has proposed that equity funds should be exempted from capital gains tax if the holding period is more than 3 years.
AMFI said, “Exemption from LTCG tax after a 3 years holding period will encourage long-term investments in equities and will help channelize more household savings into the equity markets, thus helping the Indian economy.”
Further, the threshold limit of long-term capital gains (LTCG) tax in equity funds should be increased from Rs.1.25 lakh to Rs.2 lakh for holding period of 1-3 years. Also, it should be taxed at 10% as against the current LTCG rate of 12.5%.
Also, AMFI requested the FM to reinstate taxation of equity funds at earlier rate i.e. STCG on equity funds should be taxed at 15% while LTCG rate should be 10% on gains exceeding the threshold.
Currently, LTCG in equity funds is 12.5% on income exceeding Rs.1.25 lakh if units are held for over 1 year.
Another key proposal is insertion of grandfathering clauses in debt funds i.e. allowing existing debt funds to get the benefits of indexation on MF units acquired till July 23, 2024.
Further, AMFI requested that LTCG in debt funds should be applied after 1 year. Such a tax can be charged at 12.5% without indexation in line with the listed debt securities. Currently, gains from debt funds are taxed at a marginal rate irrespective of holding period.
Here are the other key proposals of AMFI related to the MF industry:
- Currently, ELSS investment has to be made in multiples of Rs.500. AMFI has requested to remove this condition and allow investors to invest any amount provided it is at least Rs.500
- Introduction of debt linked savings scheme (DLSS) in line with ELSS. However, the trade body suggested a lock in of 5 years, which will be in line with bank FDs
- AMFI requested the ministry to provide clarity on applicability of higher TDS on when PAN becomes inoperative. Non-linkage of Aadhaar and PAN can make PAN inoperative
- Limit on applicability of TDS on dividend income in mutual funds should be increased from Rs.5000 to Rs.50000 per annum
- Currently, NRIs are subject to surcharge on TDS based on slab rate on dividend income. AMFI has proposed this to be made uniform at 10%
- MF schemes investing in the infrastructure sub sector should be included in the list of specified long assets qualifying for tax exemption on LTCG under Section 54 EC. Such a scheme can come with three-year lock in period
- MFs should be allowed to launch Mutual Fund Linked Retirement Scheme (MFLRS). These schemes should get tax benefits in line with NPS
- FoF investing in equity funds should be allowed to get equity taxation if 90% of the corpus is invested in underlying funds that invest at least 65% of its corpus in equity instruments
- A carve out should be provided for schemes investing in overseas fund or ETFs
- Reinstate the Securities Transactions Tax (STT) levied on futures & options (F&O) to their earlier rates to reduce the costs on arbitrage funds and equity savings funds that use F&O for hedging
Venkat Chalasani, Chief Executive, AMFI said that the Union Budget should prioritize investor confidence and deepen participation in mutual funds by addressing key tax-related concerns. He said, “Restoring indexation benefits for debt funds and rationalizing the capital gains tax regime, as well as the introduction of a Debt-Linked Savings Scheme, can significantly bolster long-term savings and develop the Indian bond market. Harmonizing tax treatments for pension-linked mutual funds and other investment avenues will also create a level playing field, driving financial inclusion. Additionally, simplifying TDS rules for NRIs and revising GST provisions related to mutual fund operations would alleviate compliance burdens and support robust growth. We look forward to a progressive budget that reinforces mutual funds as a pillar of economic development and investor wealth creation."
