Budget 2025: 7 Key Proposals By AMFI Which Are Likely To Impact Mutual Fund Investors

Restoration Of Long-Term Indexation Benefit For Debt Schemes

The AMFI has proposed that the tax laws should be amended for the reintroduction of the Indexation benefit on long-term capital gains from Debt Funds in respect of all investments in Debt Funds made up to March 31, 2023.

The indexation benefit on long-term gains for investments made on and after April 01, 2023, was discontinued after Budget 2023. However, investments made before March 31 2023 were permitted to avail the benefit. After the Union Budget 2024-25, the indexation benefit for all long-term investments was withdrawn, including investments made in Debt Funds prior to March 31, 2023.

Additionally, the AMFI has also proposed that the capital gains on redemption of Units of Debt-oriented mutual funds held for more than one year should be taxed at 12.5 per cent, as applicable in respect of listed bonds.

Reinstatement Of Old Capital Gains Tax Rates

The Short Term Capital Gains Tax (STCG) on the sale of mutual fund units was increased from 15 per cent to 20 per cent and the Long Term Capital Gains Tax (LTCG) was increased from 10 per cent to 12.5 per cent as a part of the Union Budget 2024-25. AMFI has proposed that the LTCG and STCG tax rates should be reduced to the pre-2024 rates.

“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 regulatory body also said that the mutual funds industry has been making consistent efforts to increase the number of investors and changes in taxation are likely to hamper the efforts to move people from traditional savings to investments. Additionally, increasing tax rates on both short-term and long-term gains will deter common investors from choosing mutual funds.

Additionally, AMFI has also requested that the capital gains on redemption of Units of Debt oriented mutual funds held for more than one year should be taxed at the rate of 12.5 per cent, as applicable in respect of listed bonds.

The AMFI said that the Finance Act, 2023 introduced a new section 50AA, which stated that the gains on ‘Specified Mutual Fund’ shall be deemed as short-term capital gains, irrespective of the period of holding and the same will be taxable at the applicable rates. After the amendment Debt mutual funds were classified as short-term capital assets.

Amendments To Section 112A of the Income Tax Act

The AMFI has proposed that the LTCG on listed equity shares or units of equity-oriented fund schemes held for more than one year and up to three years should be subjected to LTCG tax at 10 per cent (plus applicable surcharge and cess) on the capital gains exceeding Rs 2 lakh in a financial year. The AMFI has also proposed that listed equity shares or units of equity-oriented fund schemes held for more than three years should be exempted from Capital Gains tax years by suitable amendments to section 112A.

Currently as per the provisions of section 112A the LTCG arising from the transfer of equity shares or units of equity-oriented fund or units of a business trust are subject to capital gains tax at 12.5 per cent (plus applicable surcharge and cess). However, the income tax is applicable only on gains exceeding Rs 1.25 lakh in a financial year. The AMFI has said that the threshold limit of Rs 1,25,000 in a financial year is very low and exemption from capital tax after a holding period of three years will encourage long-term investments in equities.

Reduction In STT for Arbitrage Funds and Equity Savings Funds

The AMFI has proposed that the Securities Transaction Tax (STT) for Arbitrage Funds and Equity Savings Funds should be reinstated to earlier rates for investments made by Mutual Funds. Earlier in 2024, the STT was increased in Futures from 0.0125 per cent to 0.02%. The STT for options was increased from 0.0625 per cent to 0.1 per cent.

Amendments To Definition Of Equity Oriented Funds

As per the AMFI a Fund of Funds (FOF) scheme is a scheme which invests in the units of other mutual fund schemes. A FOF scheme is treated as an Equity Oriented Fund (EOF) only if a minimum of 90 per cent of the total proceeds of such fund are invested in the units of EOFs or a minimum of 90 per cent of the FOF’s total proceeds are invested in the equity shares of domestic companies listed on a recognised stock exchange.

The AMFI has requested that the definition of Equity Oriented Funds be revised to include investment in FOF schemes which invest a minimum of 90 per cent of their corpus in units of Equity Oriented Mutual Fund Schemes, which in turn invest a minimum of 65% in equity shares of domestic companies listed on a recognised stock exchange. The AMFI has also proposed that the redemption of units in FOF schemes should be subjected to the same capital gains tax, as applicable to the sale of listed equity securities or units of Equity Oriented Mutual Fund Schemes.

Amendment To ELSS Rule 3A

The AMFI has requested the Finance Ministry to amend the Equity Linked Saving Schemes (ELSS) Rule 3A to permit any amount to be invested in the scheme, instead of in multiples of Rs 500. Currently the CBDT the amount to be invested in an ELSS of a mutual fund shall be in multiples of Rs 500, with a minimum of Rs 500.

“It is requested to amend Rule 3 of Equity Linked Savings Scheme, 2005, deleting the stipulation that investments in ELSS should be multiples of Rs 500 and permit investments of any amount, subject to a minimum of Rs 500,” AMFI stated.

The AMFI said that investors often invest amounts which are not in multiples of Rs 500 because, in all other mutual fund schemes, the investment/subscriptions are accepted for any amount (subject to a defined minimum amount).

Introduction Of Debt Linked Savings Scheme (DLSS)

The AMFI has proposed the introduction of a “Debt Linked Savings Scheme” (DLSS) similar to the Equity Linked Savings Scheme (ELSS). The new type of scheme is aimed at channelling 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 regulatory body has also proposed that as a part of the scheme, at least 80 per cent of the funds collected under DLSS shall be invested in debentures and bonds of companies as permitted under SEBI Mutual Fund Regulations. Additionally, it is also proposed that investments up to Rs 1,50,000 under DLSS should be eligible for tax benefit under a separate sub-section and subject to a lock-in period of 5 years.