AMFI seeks tax relief, long-term equity investing incentives for mutual funds in Budget 2026

Ahead of the Union Budget 2026-27, the Association of Mutual Funds in India (AMFI) has released a set of industry recommendations to the Ministry of Finance, seeking tax rationalisation, long-term investment incentives and operational ease to strengthen the mutual fund industry and deepen India’s capital markets.

In its pre-Budget memorandum, AMFI said the proposals are aimed at encouraging long-term household savings, improving the depth of the corporate bond market and supporting retirement-oriented investing through mutual funds.

Here are some of the key proposals

Restore indexation benefit for debt mutual funds

AMFI has called for the restoration of long-term capital gains (LTCG) tax with indexation for debt mutual funds held for more than 36 months. Following the withdrawal of indexation, gains from most debt mutual funds are taxed at slab rates irrespective of the holding period. The industry body said the change has led to a sharp reduction in net inflows into debt mutual funds over the past three years, affecting long-term fixed-income participation and weakening the corporate bond market. It said restoring indexation would incentivise long-term savings and support funding for both corporates and the government.

Proposal for Debt-Linked Savings Scheme

To boost retail participation in the bond market, AMFI has proposed the introduction of a Debt-Linked Savings Scheme (DLSS) with a five-year lock-in period and a separate tax deduction outside Section 80C. The proposed scheme would invest at least 80 percent of its portfolio in high-quality debt instruments and is intended to provide a tax-efficient, long-term fixed-income investment option for retail investors.

Tax parity for equity fund-of-funds

AMFI has recommended amending the definition of equity-oriented funds to include fund-of-funds that invest at least 90 percent of their corpus in equity-oriented mutual fund schemes. Currently, such fund-of-funds are taxed as non-equity products despite indirect exposure to domestic equities, resulting in higher tax incidence for investors, the industry body said.

Changes sought in ELSS rules

The mutual fund industry has proposed amendments to the Equity Linked Savings Scheme (ELSS) rules, including removal of the requirement that investments be made in multiples of Rs 500. AMFI has also sought a separate tax deduction for ELSS investments under the new personal income tax regime, saying the absence of a dedicated incentive has reduced ELSS’s role as an entry-level equity product.

Incentivising long-term equity investing

AMFI has flagged that the current long-term capital gains exemption threshold of ₹1.25 lakh on equity investments is low and encourages redemptions soon after the minimum holding period. It has suggested increasing the exemption threshold and providing capital gains tax relief for equity mutual fund investments held for longer periods, including beyond five years, to promote stable long-term capital.

Push for retirement-focused mutual fund products

AMFI has proposed allowing all mutual funds to launch pension-oriented retirement schemes with tax treatment similar to the National Pension System. It has also recommended the introduction of a Mutual Fund–Voluntary Retirement Account to expand retirement savings options and encourage long-term investing through mutual fund products.

Operational and tax compliance relief

The recommendations include several operational proposals such as tax neutrality for intra-scheme switching, exemption from capital gains tax in cases of scheme consolidation or segregation, higher thresholds for TDS on income distribution and uniform surcharge rates for non-resident investors. AMFI said these measures would reduce unintended tax burdens on investors, ease compliance for asset management companies and bring consistency in taxation across similar financial products.

IFSC fund management reforms

AMFI has sought relaxation of safe harbour conditions for offshore funds managed from India’s International Financial Services Centres (IFSCs), stating that existing tax provisions remain onerous and commercially restrictive. The industry body has recommended that fund managers operating from IFSCs should not create a business connection or tax residency risk for offshore funds, and that restrictions on fee caps, profit participation limits and seed capital investments be relaxed or removed. According to AMFI, easing these conditions would make IFSCs more competitive with global fund management hubs, encourage relocation of offshore fund management activity to India and boost foreign exchange inflows.

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