AMFI’s Budget Wishlist: Bring Back Debt Fund Indexation, Ease Equity Tax Rules

The Association of Mutual Funds in India (Amfi) has submitted a detailed set of recommendations for the Union Budget FY 2026-27, spanning taxation of debt and equity mutual funds, incentives for retirement-linked products, and multiple operational and compliance proposals. Below are the most important proposals.

Fixed Income-Related Proposals

1. Restore long-term indexation benefit for Debt Mutual Funds

Amfi has sought restoration of LTCG with indexation for Debt Mutual Funds held for more than 36 months, which was withdrawn earlier. It proposes amending Sections 2, 48, 50AA, and 112 so that debt funds regain long-term capital gains taxation with indexation - 12.5 per cent (or 20 per cent with indexation).

Post Finance Act 2023, most debt mutual fund gains are taxed at slab rates regardless of holding period. This has led to a sharp reduction in net inflows into the Debt Mutual Funds over the last 3 years.

2. Introduce a Debt-Linked Savings Scheme (DLSS)

Amfi has proposed a Debt-Linked Savings Scheme (DLSS) with a 5-year lock-in and a separate deduction outside Section 80C, designed to invest ≥80 per cent in high-quality debt, with an annual investment limit under the new tax regime.

Currently, as per Amfi, retail penetration in corporate bonds is low. The Section 80C basket is crowded and does not specifically incentivise long‑term fixed‑income savings beyond EPF/PPF.

Equity-Related Proposals

1. Amend the definition of Equity-Oriented Funds to include equity-focused FoFs

Amfi wants equity taxation parity for Fund of Funds (FoF) investing in equity-oriented schemes. It proposes revising the definition to include FoFs investing a minimum of 90 per cent of corpus in Equity Oriented Mutual Fund Schemes, where underlying schemes invest a minimum of 65 per cent in listed domestic equity shares. This would bring FoF taxation at par with equity-oriented funds.

2. Remove the ELSS investment restriction of multiples of Rs 500

Amfi has asked to amend Rule 3 of ELSS 2005 by deleting the stipulation that investments must be made in multiples of Rs 500, and allowing investment of any amount, subject to a minimum of Rs 500, especially to avoid rejection/partial refunds in case of switch proceeds.

3. Changes in equity LTCG rules to encourage longer holding

Amfi proposes modifying Section 112A:

• For units held >1 year and up to 3 years, apply long-term capital gain (LTCG) tax at 12.5 per cent on gains exceeding Rs 2 lakh (instead of Rs 1.25 lakh), and

• Units held for more than 3 years are exempt from capital gains tax.

• Or, it suggests an alternative: tax exemption for equity-oriented mutual funds and specified mutual funds held for more than 5 years.

4. Separate deduction for ELSS under the new tax regime

Amfi seeks a dedicated tax incentive for ELSS under the new personal tax regime - a separate deduction (like Section 80CCD(1B)) exclusively for ELSS investments, with a notified cap.

Social Security Related Proposals

1. Pension products by mutual funds with uniform tax treatment as NPS

Amfi wants all mutual funds to be allowed to launch a Mutual Fund Linked Retirement Scheme (MFLRS) with EEE tax treatment, permitting employee and employer contributions and deductions under a new/parallel provision akin to Section 80CCD, with vesting and withdrawal rules tailored for retirement.

2. Introduce a Mutual Fund – Voluntary Retirement Account (MF-VRA)

Amfi proposes an MF-based retirement product similar to a 401(k) plan, i.e., MF-VRA, with a specific tax deduction section under both old and new regimes. It suggests allowing contributions eligible for tax deductions under Section 80C, along with possible additional incentives.

Other Proposals

1. Exempt intra-scheme switching from capital gains tax

Amfi argues that switching within the same mutual fund scheme (Growth to IDCW, Direct to Regular) is treated as a transfer and attracts capital gains tax even though the underlying portfolio remains unchanged. It proposes amending Section 47 to ensure intra-scheme switches are not regarded as transfers and are exempt from capital gains tax.

2. Uniform surcharge rate on TDS for NRIs

Amfi proposes amending surcharge provisions so that for mutual fund payments to NRIs (dividend and redemption capital gains), the surcharge rate on TDS is prescribed as a uniform flat 10 per cent, instead of a slab-based varying surcharge.

3. Increase the dividend TDS threshold for residents

Amfi seeks to increase the threshold for TDS under Section 194K on mutual fund income distribution from Rs 10,000 to Rs 50,000 per annum, citing hardship to retail investors.

4. Mutual fund units specified as long-term assets under Section 54EC

Amfi suggests allowing LTCG exemption under Section 54EC for mutual fund units investing in specified infrastructure sub-sectors, with a 3-year lock-in, similar to current notified bonds.

5. Extend Section 87A rebate to special-rate incomes

Amfi proposes allowing the Rs 60,000 rebate under Section 87A even for income taxable at special rates (capital gains under Sections 111A, 112, and 112A) when total income does not exceed Rs 12 lakh.

Apart from the major suggestions, Amfi has sought reinstatement of the earlier STT rates on futures and options for mutual funds, citing the impact on arbitrage and equity savings funds, after STT was raised from 0.0125 per cent to 0.02 per cent for futures and from 0.0625 per cent to 0.1 per cent for options. It has also asked CBDT to clarify that mutual funds need not deduct higher TDS for inoperative PAN cases where the PAN was valid at the time of onboarding.

Further, Amfi wants mutual funds to be exempted from filing Forms 15CA/15CB for payments to non-resident investors, given the industry’s transaction volumes and existing TDS reporting. Lastly, it has been suggested that STT should be exempted from purchase and sale transactions undertaken in financial markets, including mutual fund units.