Budget 2025: AMFI Seeks Tax Policy Reforms To Drive Mutual Fund Investments In 15-Point Proposal

The Association of Mutual Funds of India on Monday released a 15-point proposal for Union Budget 2025-26 requesting changes in tax policies that are impacting the mutual fund investors. The proposal also calls for restoration of long-term indexation benefits for debt schemes that were withdrawn in the Union Budget 2024 and for an amendment in the definition of equity-orientated funds to include funds of funds investing in equity overseas funds.

India's equity market is strong, but the debt market remains underdeveloped. To encourage retail investor participation, AMFI proposed amending the Finance Act, 2023, to treat mutual fund units as "securities" and align their long-term capital gains tax with that of listed bonds. It requested that the "capital gains on redemption of units of debt-orientated mutual funds held for more than one year should be taxed at the rate of 12.5%," which is currently applicable for the listed bonds.

It also requested a review of the withdrawal of indexation on long-term debt investments and urged for the tax laws to be amended to restore the indexation benefit on long-term capital gains from debt funds for all investments made until March 31, 2023.

Mutual funds play a key role in channelling savings into productive assets like equity and fixed income, contributing to nation-building. Increasing tax rates on both short-term and long-term gains could discourage ordinary investors from choosing mutual funds.

With over five crore investors, the industry has worked hard to grow this base, and any changes in tax policy could hinder the shift from traditional savings to investments. Keeping this in mind, AMFI has asked for the reinstatement of the previous capital gains tax rates. According to the recent hike, short-term rates are at 20%, and the long-term rate is at 12.5%. This hike represents a significant increase that could negatively impact investor participation, it said in its statement.

The current definition of "equity-orientated funds" for a fund of funds is limited to ETFs investing at least 90% in domestic equity, while other equity-orientated funds require only 65% investment in domestic equities. As a result, FoFs investing in equity securities do not receive the same tax treatment as equity-orientated funds, despite their similar investment focus.

AMFI has requested that the definition of "Equity Orientated Funds" be revised to include FoFs that invest at least 90% in units of equity-orientated mutual fund schemes, which, in turn, invest at least 65% in domestic equities. This would align their tax treatment with that of directly held equity and equity-orientated funds.

The current threshold limit of Rs 5,000 for TDS on income (dividend) distribution from mutual fund units is too low, particularly for individuals in the lower income brackets. This limit creates unnecessary hardship for retail investors, who are forced to claim a refund of TDS in the next assessment year.

To ease this burden, it has requested that the threshold limit for withholding tax (TDS) on income distribution from mutual fund units be raised from Rs 5,000 to Rs 50,000 per year. This change would benefit retail investors and simplify the process for those with lower incomes.