Budget 2025: Restore Pre-2024 Capital Gains Tax Rates Ahead of February 1, Says AMFI

Ahead of the presentation of the Union Budget for 2025, the Association of Mutual Funds In India (AMFI) has submitted its proposals to the Ministry of Finance. The 15-point proposal has many suggestions that if implemented by the ministry are likely to impact both the mutual fund industry and mutual fund investors.

One of the key proposals submitted by the AMFI pertains to the reinstatement of the earlier tax rates on capital gains. Earlier in 2024, the Finance Ministry hiked the Short Term Capital Gains Tax(STCG) from 15 per cent to 20 per cent. AMFI stated that the rate hike has increased tax liability by 30 per cent. Additionally, the Long Term Capital Gains Tax (LTCG) was increased from 10 per cent to 12.5 per cent, increasing tax liability by 25 per cent.

STCG refers to the gains or profits made from the sale of assets held for a year or less. On the other hand, profits from the sale of assets held for over a year are classified as LTCG. The AMFI has proposed that the capital gains tax rates of 15 per cent on STCG and 12.5 per cent on LTCG should be reinstated.

“It is humbly submitted to re-instate the earlier capital gains taxation rates as the percentage of the hike is large quantum,” the AMFI said.

The AMFI also stated in the proposal that an increase in tax rates is likely to deter investors from investing their money in mutual funds. The regulatory body added that the move is also likely to hamper the industry-wide effort which is aimed at diverting investments from traditional savings towards mutual funds.

“Increasing tax rates on both short-term and long-term gains will deter common investors from choosing mutual funds. More than five crore investors invest in mutual funds and the industry has been making consistent efforts to increase this number. Any change in taxation will hamper the efforts to move people from traditional savings to investments,” AMFI said.

Anand K Rathi, the Co-Founder of MIRA Money, told Outlook Money that a return to pre-2024 tax rates is likely to boost retail participation in the mutual fund market. He added that the news of the proposal itself has led to a resurgence in confidence among investors.

“There is a strong likelihood that a return to pre-2024 tax rates will significantly boost retail participation. While the tax amendment did cause a slowdown in the historical trend of increasing investments in debt mutual funds, the recent news of the proposal has already sparked confidence. It is expected that more money will start flowing into debt mutual funds, thereby enhancing retail participation in the debt market, a positive development for the sector,” the Co-Founder said.

AMFI has also proposed that the Finance Ministry should bring the capital gains tax charged on redemption of units of debt-oriented mutual funds at par with the tax rate applicable on listed bonds.

“It is requested that Capital gains on redemption of Units of Debt oriented mutual funds held for more than 1 year should be taxed at the rate of 12.5 per cent, as applicable in respect of listed bonds,” AMFI stated.

A new section called ‘50AA’ was introduced as a part of the Finance Act, 2023. The section stated that the gains on the ‘Specified Mutual Fund’ will be classified as short-term capital gains, irrespective of the time period for which they are held by the investor prior to redemption.

After the amendment debt mutual funds are considered as short-term capital assets irrespective of how long they are held for. On the other hand, if listed bonds are held for more than a year the tax applicable on their redemption is 12.5 per cent.

Rathi also said that if the proposal is accepted by the Finance Ministry it could bring significant benefits to investors in mutual funds in debt. Rathi also projected that the implementation of the proposal could lead to better prospects for debt investors.

“If the proposal is accepted and implemented, it could bring significant benefits to investors in mutual funds in debt. This would lead to additional post-indexation gains, a promising prospect for debt investors. Moreover, it would stimulate more retail participation in the debt market, potentially shifting the current trend where many only invest in fixed deposits and similar instruments. This change would not only open up debt options to more individuals but also boost overall liquidity in the debt market, a positive development for the sector,” Rathi said.