Budget 2026 wishlist: Mutual fund industry looking for easier taxes, Indexation for debt funds, higher LTCG relief from FM 

If you invest in mutual funds or are considering starting, the Union Budget 2026 could play a meaningful role in shaping both your tax liability and long-term returns. With the Union Budget set to be presented on February 1 by Finance Minister Nirmala Sitharaman, the mutual fund industry has placed a set of investor-focused demands before the government, aimed at making long-term investing more predictable, tax-efficient, and retirement-oriented.

The Association of Mutual Funds in India (AMFI), the industry’s representative body, has urged the government to reconsider some recent tax changes and introduce new structures that better reflect the evolving needs of retail investors. At the core of AMFI’s recommendations is a push to encourage patient capital, reduce uncertainty around taxation, and widen participation beyond equity-heavy portfolios.

Tax treatment of debt mutual funds

One of AMFI’s primary demands is the restoration of indexation benefits for long-term debt mutual funds. These benefits were removed in recent budgets, resulting in debt fund gains being taxed without adjusting for inflation. For investors who use debt funds for stability, income, or diversification, this change has significantly lowered post-tax returns.

Indexation allows the purchase cost of an investment to be adjusted for inflation, ensuring that only real gains are taxed. Without it, investors may end up paying tax even when returns barely beat inflation. AMFI argues that restoring indexation would make taxation fairer and encourage long-term use of debt funds for goals such as retirement planning, education, or capital preservation. From a broader perspective, higher flows into debt funds could also support India’s corporate bond market by channeling household savings into productive capital.

Tax-saving option

Currently, most tax incentives within mutual funds favour equity investors, particularly through Equity Linked Savings Schemes (ELSS). AMFI has proposed introducing a Debt Linked Savings Scheme (DLSS), which would function as a tax-saving instrument for investors with lower risk appetite.

Such a scheme would offer tax deductions similar to ELSS but invest primarily in debt instruments. For conservative or near-retirement investors who are uncomfortable with equity volatility, this could provide a more suitable option for tax planning while maintaining relatively stable returns. The proposal aims to bring balance to the tax framework by recognising that not all investors have the same risk tolerance or time horizon.

Higher exemption limit

For equity mutual fund investors, AMFI has recommended increasing the annual tax-free limit on long-term capital gains. Currently, gains beyond Rs 1.25 lakh are taxable. Raising this threshold to Rs 2 lakh would reduce the tax burden on small and medium investors, particularly those investing gradually through SIPs.

A higher exemption limit could make long-term equity investing more attractive by improving post-tax outcomes and encouraging investors to stay invested through market cycles. AMFI believes this would reinforce disciplined investing behaviour rather than short-term profit-taking.

Longer holding periods

Taking the long-term approach a step further, AMFI has suggested exempting equity mutual fund units from long-term capital gains tax if they are held for more than five years. The idea is to reward investors who remain invested over extended periods, aligning tax policy with the objective of long-term wealth creation.

Such a move could discourage frequent churn, reduce speculative behaviour, and strengthen the role of mutual funds as long-term savings vehicles rather than short-term trading instruments.

Pension-style mutual funds with tax parity

Another significant proposal is to allow mutual funds to offer pension-oriented schemes with tax benefits similar to those available under the National Pension System (NPS). While NPS plays an important role in retirement planning, some investors find it restrictive due to lock-ins and limited flexibility.

Pension-style mutual funds could offer an alternative by combining professional fund management, transparency, and flexibility with retirement-focused tax incentives. This would give investors more choice in structuring their retirement portfolios and reduce reliance on a single product category.

Budget outlook

Separately, expectations for Budget 2026 suggest limited scope for major tax surprises, as recent reforms are still being absorbed by markets and taxpayers. Capital expenditure is expected to remain a central theme, with spending projected at around 3–3.1% of GDP. The emphasis is likely to remain on infrastructure development, execution efficiency, and continued support for state-level capital spending.

For mutual fund investors, the upcoming Budget may not bring sweeping changes overnight, but AMFI’s proposals highlight a clear direction: encouraging long-term, disciplined investing while making the tax system more aligned with real returns and retirement needs. Whether the government adopts these suggestions will determine how effectively mutual funds can continue to serve as a core wealth-building tool for Indian households.