Ahead of the Union Budget 2026-27, the Association of Mutual Funds in India (AMFI) has submitted a set of recommendations to the Ministry of Finance, calling for tax rationalisation, incentives for long-term investing, and operational simplification to strengthen the mutual fund industry and deepen India’s capital markets.
In its pre-Budget memorandum, AMFI said the proposals aim to encourage long-term household savings, improve liquidity in the corporate bond market, and promote retirement-focused investing through mutual funds.
Restore Indexation Benefit for Debt Mutual Funds
AMFI has urged the government to restore long-term capital gains (LTCG) tax with indexation for debt mutual funds held for more than 36 months. After the withdrawal of indexation benefits, gains from most debt mutual funds are now taxed at individual slab rates, regardless of holding period.
The industry body said this change has led to a sharp decline in net inflows into debt mutual funds over the past three years, weakening long-term participation in fixed-income markets and affecting the depth of the corporate bond market. Restoring indexation, AMFI argued, would incentivise long-term savings and support borrowing requirements of both corporates and the government.
Proposal for a Debt-Linked Savings Scheme
To boost retail participation in fixed-income investments, AMFI has proposed introducing a Debt-Linked Savings Scheme (DLSS). The suggested product would have a five-year lock-in period and offer a separate tax deduction outside Section 80C.
Under the proposal, the scheme would invest at least 80% of its portfolio in high-quality debt instruments, providing retail investors with a tax-efficient, long-term alternative to existing fixed-income options.
Tax Parity for Equity Fund-of-Funds
AMFI has also recommended changes to the definition of equity-oriented funds to include fund-of-funds (FoFs) that invest at least 90% of their corpus in equity mutual fund schemes.
Currently, such FoFs are taxed as non-equity products despite their indirect exposure to domestic equities, leading to a higher tax burden for investors. The industry body said aligning their tax treatment with equity funds would remove this anomaly.
Changes Proposed for ELSS Rules
The mutual fund industry has sought amendments to the Equity Linked Savings Scheme (ELSS) framework. Key proposals include removing the requirement that investments be made in multiples of ₹500, making ELSS more accessible to small investors.
AMFI has also called for a separate tax deduction for ELSS under the new personal income tax regime, noting that the absence of a dedicated incentive has diminished ELSS’s role as an entry-level equity investment product.
Incentives for Long-Term Equity Investing
AMFI flagged concerns that the current ₹1.25 lakh exemption limit on long-term capital gains from equity investments is relatively low and encourages redemptions soon after the minimum holding period.
To promote stable, long-term capital formation, the industry body has suggested increasing the exemption threshold and offering capital gains tax relief for equity mutual fund investments held for extended periods, including beyond five years.
Push for Retirement-Focused Mutual Fund Products
To expand retirement savings options, AMFI has proposed allowing all mutual funds to launch pension-oriented retirement schemes with tax treatment similar to the National Pension System (NPS).
It has also suggested the creation of a Mutual Fund-Voluntary Retirement Account, aimed at encouraging long-term retirement investing through market-linked mutual fund products.
Operational and Tax Compliance Relief
The recommendations include several operational reforms, such as:
- Tax neutrality for intra-scheme switching
- Exemption from capital gains tax during scheme consolidation or segregation
- Higher thresholds for TDS on income distribution
- Uniform surcharge rates for non-resident investors
AMFI said these measures would reduce unintended tax burdens on investors, simplify compliance for asset management companies, and ensure consistency across similar financial products.
IFSC Fund Management Reforms
AMFI has also sought reforms for fund managers operating from International Financial Services Centres (IFSCs). It said current safe harbour conditions remain restrictive and commercially unviable.
The industry body recommended that offshore funds managed from IFSCs should not create business connection or tax residency risks in India. It also called for relaxation or removal of restrictions on fee caps, profit participation limits, and seed capital investments.
According to AMFI, easing these conditions would enhance the global competitiveness of IFSCs, encourage relocation of offshore fund management activity to India, and support higher foreign exchange inflows.
Outlook Ahead of Budget 2026-27
AMFI’s proposals reflect the industry’s push for a long-term, stable, and investor-friendly tax framework. As expectations build ahead of Budget 2026–27, the recommendations highlight the mutual fund industry’s role in supporting capital formation, retirement savings, and market depth.
Source: Moneycontrol