Budget 2026: Mutual Funds Seek Relief On Capital Gains Tax To Boost Debt Fund Investment

Mutual fund managers have requested the Centre to reduce the tax burden in the upcoming Union Budget to be presented on February 1, 2026. A relief on capital gains taxes on debt investments will help boost market participation among retail investors, they said.

Notably, the Association of Mutual Funds in India (Amfi) has also proposed to restore the long-term capital gains (LTCG) tax along with indexation benefits for investors holding debt mutual funds for more than 36 months. This benefit, which was available earlier, was withdrawn in the Finance Act 2023. Amfi proposed the Centre to amend Sections 2, 48, 50AA, and 112 of the Act in a way that debt funds could regain LTCG taxation benefits at 12.50 per cent or at 20 per cent including indexation.

At present, debt fund investments regardless of the duration of investment attracts taxation according to the taxpayer’s slab rate.

Debt mutual funds have seen outflows since November 2025. In December 2025 alone, investors took out around Rs 1.32 lakh crore from debt funds, according to data from Amfi.

Investors reallocated their funds to equity or related mutual funds. A major factor for the outflows is due to rise in bond yields on the back of a cut in the repo rate by the Reserve Bank of India (RBI) in 2025. But experts have pointed out that the change in taxation has also reflected in an overall tepid response to debt funds.

“If (the government) really wants to do (something) now, they should do something on the tax front. If you stay invested for three years, five years or so, you need to give some tax benefits and people will come,” says Marzban Irani, chief investment officer – debt at LIC Mutual Fund.

Both RBI Governor Sanjay Malhotra and chairman of the Securities and Exchange Board of India (Sebi), Tuhin Kanta Pandey, have called for increase in retail investor participation in bond markets to deepen the market. A report by NITI Aayog has also pointed out the need for deepening retail participation in the bond market to achieve India’s Viksit Bharat 2047 goals.

There has been a significant rise in retail investor participation with the advent of Sebi-registered online bond platforms as well as with RBI’s retail direct platform. Monthly trade volumes on the RFQ platform surged to nearly 155,000 in October, up nearly fourfold since the beginning of FY26. However, overall retail participation in bond markets, especially in corporate bonds remains abysmally low compared to institutional investors, below 4 per cent according to some estimates.

Market participants have also pointed to the lack of awareness among retail investors to invest in bonds directly. Mutual fund managers say that a relief in taxation on debt investments could help bring in more retail investors into the fold.