Ahead of the Union Budget 2026-27, the Association of Mutual Funds of India (AMFI) on Tuesday recommended 27 proposals, including restoration of long-term indexation benefit in debt schemes, separate deduction for investment in Equity Linked Savings Scheme (ELSS) under the new tax regime and parity in tax treatment.
In his proposals for Union Budget 2026-27, the mutual fund body has suggested increase in withholding tax (TDS) limit on distribution of income by mutual fund scheme, restoration of earlier tax rates on capital gains and removal of Securities Transaction Tax (STT) on purchase or sale transactions carried out in financial markets, including mutual fund units.
As part of its suggestions related to fixed income, the industry body urged restoration of long-term indexation benefit for mutual fund debt schemes. which was withdrawn in Budget 2024.
It said that after the Finance Act, 2023, most gains from debt MFs are taxed at fixed rates, irrespective of the holding period, section 50AA of the Income Tax Act, 1961. This has led to a sharp reduction in net inflows to debt mutual funds over the last three years.
“Restore long-term capital gains (LTCG) with indexation for debt mutual funds held for 36 months by amending sections 2, 48, 50AA and 112 of the Act (sections 2, 72, 76 and 197 of the bill),” the industry body said in its proposal.
It recommended that the definition of ‘equity-oriented funds’ be revised to include investment in fund-of-fund schemes that invest a minimum of 90 per cent of the corpus in units of equity-oriented mutual fund schemes, which in turn invest a minimum of 65 per cent in shares of domestic companies listed on a recognized stock exchange.
AMFI said it has suggested that LTCG on listed shares or units of capital oriented fund schemes held for more than one year and up to three years should be subject to LTCG tax of 12.5 per cent (plus applicable surcharge and cess) on capital gains exceeding Rs 2 lakh in a financial year. For plans held for more than three years, it has recommended exemption from capital gains tax years.
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The industry body has sought an amendment to ELSS Rule 3A to allow any amount to be invested in the scheme, instead of multiples of Rs 500.
“Provide separate deduction (on the lines of Section 80CCD (1B) of the Act (Section 124 of the Bill)) exclusively for ELSS investments under the new tax regime, with a notified limit,” the mutual fund body proposed.
It has sought parity in tax treatment with respect to shifting of intra-scheme units under mutual fund schemes.
“It is proposed that intra-scheme changes, i.e. change of investments within the same mutual fund scheme, should not be considered as a ‘transfer’ under section 47 of the Act (Section 70 of the Bill) and the same should be exempted from payment of capital gains tax,” AMFI said in its proposal.
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To increase retail participation in the corporate bond market, AMFI has proposed to introduce Debt Linked Savings Scheme (DLSS).