Budget 2025: What is DLSS? All You Need To Know About This New Asset Class Proposed By AMFI

The Association of Mutual Funds In India (AMFI) submitted its proposals to the Ministry of Finance ahead of the presentation of the Union Budget for 2025. The AMFI has proposed that a new asset class called ‘Debt Linked Savings Scheme’ should be introduced in India.

Here’s all you need to know about the newly proposed asset class:

What Is DLSS

The AMFI said in its proposal that the asset class should be on the lines of the Equity Linked Savings Scheme (ELSS). The regulatory body added that the proposed scheme is aimed at channelising long-term savings of retail investors towards investment in higher credit-rated debt market instruments.

“It is proposed to introduce “Debt Linked Savings Scheme” (DLSS) on the lines of an Equity Linked Savings Scheme (ELSS) to channelise long-term savings of retail investors into higher credit-rated debt instruments with appropriate tax benefits which will help in deepening the Indian Bond Market,” the AMFI said.

What Will A Debt-Linked Savings Scheme Invest In

The AMFI also said that a minimum of 80 per cent of the funds collected by DLSS schemes will be invested in debentures and bonds of companies. AMFI added that the remaining funds will be invested in the money market and other liquid instruments.

Additionally, the AMFI also proposed that investments up to Rs. 1,50,000 made in DLSS should be eligible for tax benefit under a separate subsection and have a lock-in period of five years.

Who Is DLSS Ideal For?

Viral Bhatt the founder of Money Mantra told Outlook Money that investment in DLSS is ideal for risk-averse investors, conservative tax savers and fixed-income seekers. Bhatt said that individuals with low-risk tolerance who choose capital preservation over high returns can opt for DLSS.

“Individuals with low-risk tolerance who prioritize capital preservation over high returns. Those who prefer lower volatility compared to equity-linked schemes,” Bhatt said.

He added that taxpayers who opt for the Old Tax Regime and want an alternative to high-risk investments such as ELSS or other market-linked products can also opt for DLSS.

“Taxpayers looking for 80C deductions under the Income Tax Act but unwilling to invest in high-risk instruments like ELSS or market-linked products. Ideal for those nearing retirement who seek stability while saving on taxes,” Bhatt said.

Bhatt also mentioned that people who are seeking better returns than traditional fixed-income instruments such as fixed deposits or the Public Provident Fund (PPF) but want similar stability can also opt for DLSS investments. He added that the scheme is ‘especially suitable for retirees’ who want predictable returns and capital security.

How is DLSS different from ELSS?

ELSS was introduced as an investment option in 1992 to encourage retail investments in equity instruments. By providing tax benefits under the Income Tax Act, 1961 for investments in ELSS. Bhatt said that DLSS and ELSS differ significantly in terms of risk, returns, and investment focus.

Bhatt said that DLSS investments are focused on capital preservation and stable returns on the other hand ELSS invests in equity and equity-related instruments in order to achieve long-term capital appreciation.

“DLSS primarily invests in fixed-income securities like government bonds, corporate bonds, and other debt instruments with a focus on capital preservation and stable returns. ELSS primarily invests in equity and equity-related instruments. Focus is on long-term capital appreciation,” Bhatt told Outlook Money.

In terms of returns, DLSS is likely to offer relatively moderate returns compared to ELSS since the returns are aligned with the interest rates for the debt market. However, returns from investments in ELSS are subject to the conditions of the equity markets.

“DLSS offers moderate and predictable returns, often aligned with interest rates in the debt market. Historically, it gives lower returns compared to ELSS over the long term. ELSS offers potentially higher returns over the long term due to equity market exposure. Returns are subject to market performance,” Bhatt said.

Why Does AMFI Want To Introduce DLSS

The AMFI said in its proposal that it plans to deepen the Indian Bond market. AMFI added that it is necessary to channelise the long-term savings of retail segment into the bond market.

“To deepen the Indian Bond market and strengthen the efforts taken by RBI and SEBI for increasing penetration in the corporate bond markets, it is expedient to channelize long-term savings of retail segment into the corporate bond market through Mutual funds on the same lines as ELSS,” AMFI stated in its proposal.

Bhatt said that the introduction of DLSS simplifies access to debt market instruments, making it easier for retail investors to invest in them indirectly.

“DLSS simplifies access to bonds by packaging them into a tax-saving product, making it easier for retail investors to invest in bonds indirectly. The tax benefits under Section 80C incentivise retail investors to participate, channelling their funds into the bond market through DLSS,” Bhatt said.

Bhatt also projected that as DLSS gains popularity, there may be a demand for varied types of bonds such as green bonds and social bonds.

“As DLSS gains popularity, demand for varied types of bonds may lead to the introduction of innovative products, such as green bonds or social bonds, enhancing the depth of the bond market,” Bhatt said.