The Association of Mutual Funds in India (AMFI) has submitted a 15-point proposal ahead of the Union Budget 2025-26. These proposals seek reforms to taxation policies that aim to bolster mutual fund investments and improve investor confidence. The suggestions focus on restoring indexation benefits, aligning pension schemes with NPS, and introducing debt-linked savings plans.
Proposal:
AMFI has urged the government to restore indexation benefits for long-term debt fund investments made before March 31, 2023.
Rationale:
The 2024 budget removed this benefit retroactively, affecting investor sentiment. Debt mutual funds, which typically yield 6-8%, rely on indexation to neutralise inflation. AMFI argues this change discourages long-term investments and calls for fairness similar to tax reliefs extended to the real estate sector.
Proposal:
The association seeks to reinstate earlier capital gains tax rates for mutual funds. It recommends a 12.5% tax rate for long-term gains on debt funds held for over one year, similar to listed bonds.
Rationale:
Higher taxes deter retail investors from participating in mutual funds, which play a vital role in channelling savings into productive assets. A competitive tax structure is seen as essential to deepen India’s bond markets and attract investments.
Proposal:
AMFI suggests revising the definition of equity-oriented funds to include Funds of Funds (FoFs) investing 90% or more in equity-oriented schemes.
Rationale:
FoFs face higher tax rates despite indirectly investing in equity instruments. Aligning their tax treatment with equity funds will encourage diversification without tax penalties.
Proposal:
Mutual funds should be allowed to launch pension-oriented schemes with tax benefits equivalent to the National Pension System (NPS).
Rationale:
A uniform tax treatment under Section 80CCD will encourage retirement planning and bring mutual fund-linked retirement schemes on par with NPS, attracting long-term investors.
Proposal:
Mutual funds investing in infrastructure assets should be considered ‘specified long-term assets’ under Section 54EC, offering tax exemptions for reinvested gains.
Rationale:
This change can channel capital gains into infrastructure development, offering better returns than low-interest bonds while reducing the government’s borrowing burden.
Proposal:
Simplify taxation provisions for offshore funds managed by Indian portfolio managers to encourage foreign investment.
Rationale:
Relaxing conditions under the ‘safe harbour’ regime will attract global funds, strengthen India’s financial ecosystem, and create employment in the fund management industry.
Proposal:
Introduce a flat 10% surcharge on Tax Deducted at Source (TDS) for NRIs instead of a slab-wise structure.
Rationale:
A uniform rate simplifies compliance and addresses inconsistencies in TDS deductions, benefiting both investors and mutual funds.
Proposal:
AMFI suggests launching DLSS on the lines of Equity-Linked Savings Schemes (ELSS), offering tax benefits and a 5-year lock-in period for investments in high-rated bonds.
Rationale:
DLSS can deepen the bond market, reduce reliance on banks, and provide a safer fixed-income option with tax incentives for retail investors.
Proposal:
Raise the TDS threshold on mutual fund dividends from ₹5,000 to ₹50,000 per annum.
Rationale:
The current low threshold creates administrative burdens and affects low-income investors who must claim refunds later.
Proposal:
Allow investments in ELSS in any amount, rather than requiring multiples of ₹500.
Rationale:
Modern digital payment systems eliminate the need for such restrictions, making investments more seamless and accessible.
Proposal:
Exempt mutual funds from GST compliance related to securities lending transactions, as anonymity between borrowers and lenders complicates invoicing.
Rationale:
Simplification will ease administrative efforts without affecting government revenues, as GST is already paid under reverse charge mechanisms.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
Published on: Jan 7, 2025, 2:42 PM IST
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