Budget 2025: AMFI asks FM Nirmala Sitharaman to restore indexation benefit for debt MFs

Union Budget 2025: The AMFI has urged for the reinstatement of the long-term indexation benefit for debt schemes of mutual funds, a feature that was eliminated in the Budget 2024. AMFI is of the opinion that the reinstatement of this provision will be crucial in maintaining confidence among retail investors and in stimulating growth within India's bond market.

According to 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.

Debt funds

The Budget 2023 eliminated the indexation benefit for new investments effective April 1, 2023. This meant that investments made before March 31, 2023 would still be eligible for indexation. However, the July 2024 Budget revoked the indexation benefit for all previous long-term investments in debt funds, including those made before March 31, 2023.

“It is our humble and a logical request to kindly revisit the withdrawal of indexation on long term debt investments and restore the status quo ante by amending the tax laws re-introducing the indexation benefit on long term capital gains from debt funds in respect of all investments in debt funds made up to March 31, 2023,” AMFI said in its 15-point proposal.

In the 2024 Budget, the government removed the benefit of indexation for all long-term debt fund investments made prior to or on March 31, 2023, applying it retrospectively. 

Debt mutual funds are currently regarded as short-term capital assets and are subject to applicable tax rates regardless of the holding period.

In Budget 2024, the short-term capital gains tax was raised from 15% to 20%, resulting in a 30% increase in tax liability. Additionally, the long-term capital gains tax saw an increase from 10% to 12.5%, leading to a 25% increase in tax liability.

The Association of Mutual Funds in India (AMFI) has put forth a proposal in Budget 2025 to revert back to the previous capital gains tax rates due to the significant percentage hike.

AMFI has also recommended reinstating the earlier Securities Transaction Tax (STT) rates for futures and options for mutual fund investors. In the previous budget, the STT rate for futures was increased from 0.0125% to 0.02% and for options from 0.0625% to 0.1%

In their recommendations for the Union Budget 2025-26, it also advocated for a revision of the definition of equity oriented funds, permission for mutual funds to introduce pension-oriented schemes with tax treatment similar to NPS, and a standardised surcharge deduction rate for TDS applicable to NRIs.

Equity-oriented funds

The mutual fund regulatory body has proposed a revision to the definition of equity oriented funds (EOFs) to encompass fund of funds (FOF) that invest in equity oriented funds. Specifically, a FOF scheme within a mutual fund scheme allocates its investments to units of other mutual fund schemes.

Currently, under the existing income tax regulations, a FOF scheme is classified as an EOF only if at least 90% of its total proceeds are invested in units of EOFs. Additionally, these EOFs must also invest a minimum of 90% of their total proceeds in equity shares of domestic companies listed on a recognised stock exchange.

NPS and pension funds

AMFI has recommended aligning the tax treatment for NPS with retirement/pension-oriented schemes offered by mutual funds. This would involve including the mutual fund schemes under Section 80CCD of the IT Act, 1961, to ensure consistency with the tax exemptions currently available for NPS.

Presently, NPS qualifies for tax benefits under Section 80CCD, while only a limited number of mutual fund retirement/pension schemes approved by CBDT are eligible for tax benefits under Sec. 80C.

Additionally, AMFI has suggested expanding the scope of long-term capital gains tax exemption to include mutual fund units that invest in specified infrastructure sub-sectors as part of the list of specified long-term assets.