Budget 2025: Why mutual fund industry is pressing for tax relief for debt funds?
Budget 2025: The Association of Mutual Funds in India (AMFI) has urged for the reinstatement of the long-term indexation benefit for debt schemes of mutual funds, which was removed in the Budget 2024.
AMFI has put forth several proposals for the Union Budget 2025-26, including a request to revert to previous tax rates on capital gains, redefine equity-oriented funds, permit the introduction of pension-oriented MF schemes with equal tax treatment as the National Pension Scheme (NPS), and establish a consistent surcharge deduction rate on TDS for NRIs.
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The mutual fund industry is eagerly anticipating the return of tax relief for debt funds, specifically the potential reintroduction of indexation benefits in the upcoming Union Budget of 2025.
The MF industry believes that indexation serves as a necessary tool to counteract the effects of inflation on investments. Without this benefit, investors in Debt Mutual Funds will face increased taxation at a marginal rate, resulting in significant financial consequences. It is clear that tax relief for debt funds is a top priority for the mutual fund industry, as it plays a crucial role in maintaining investor confidence and promoting growth within the sector.
After Budget 2024, as per Section 50AA, mutual funds primarily invested in debt and money market instruments, with over 65% of their portfolio allocated to such assets, are categorised as “Specified Mutual Funds” or debt funds.
Amfi stated: “Indexation is not a tax waiver but a neutraliser to the impact of inflation. The removal of indexation benefit will have a material impact on Debt Mutual Fund investors. It may be noted that the debt mutual fund investors are anyway getting taxed at a marginal rate since April 1, 2023 which has already hurt them significantly.”
“The expectations from Budget 25 is focussed towards making taxation for investments fair for all products so that middle-class can enjoy the benfit of the same especially with 66% of taxpayers earning less than ₹25 lakh annually. Reinstating indexation benefits for debt mutual funds is not only a practical move but a necessary one—it ensures long-term investors are not penalized by inflation,” said Feroze Azeez, Deputy CEO, Anand Rathi Wealth Limited.
He added: “Re-introducing long-term capital gains tax at 12.5% for debt funds would also bring much-needed parity with equity investments, making these products more appealing to high-income earners who currently pay at the highest tax rate. AMFI has laid down requests to treat retirement oriented schemes and NPS to have same tax treatment to bring them at par. NPS today while it offers better tax relief has a greater lockin period, yet seems like a more attractive option.”
“To unlock the full potential of India’s debt capital markets, the upcoming budget must prioritise making debt funds more attractive through favourable taxation policies. A robust debt market will enhance liquidity, provide companies with better cost of capital, and enable them to undertake capex with a healthy mix of debt and equity, driving long-term growth and financial stability,” said Rahul Bhutoria, director and founder Valtrust.
“Mutual funds play a significant part in supporting infrastructure financing and facilitating the transmission of monetary policy changes. Aligning tax incentives would not only level the playing field but also bolster the corporate bond market and enhance investor confidence. Similarly, extending the tax benefits of NPS to mutual funds, especially for pension-oriented schemes, would streamline the system and reinforce the mutual fund industry’s role as a cornerstone of long-term investment planning,” said Mahendra Kumar Jajoo, chief investment officer – Fixed Income, Mirae Asset Investment Managers (India).
“Apart from these, India needs a new tax slab for incomes between Rs 15–25 lakh or extending the Section 87A rebate to Rs 10 lakh could transform middle-class finances. Overall, these are some steps toward a fairer system will encourages savings and boost the economic participation and expect the Budget to create fairness in the market,” Azeez further said.
Debt fund taxation
The Budget revision of 2023 removed the indexation benefit for new investments starting from April 1, 2023. This change allowed investments made prior to March 31, 2023 to remain eligible for indexation. Subsequently, the Budget update in July 2024 rescinded the indexation benefit for all prior long-term investments in debt funds, including those made before March 31, 2023.
Currently, debt mutual funds are categorized as short-term capital assets and are subject to relevant tax rates irrespective of the duration of holding. In the recent Budget 2024, the short-term capital gains tax rate was heightened from 15% to 20%, resulting in a 30% rise in tax obligations. Furthermore, the long-term capital gains tax rate also increased from 10% to 12.5%, leading to a 25% escalation in tax liability.