Expectations around the Union Budget often influence the headlines, reflecting hopes and demands from various sectors. However, not all expectations are interpreted into decisions, as the final verdict always rests on the government’s priorities and vision. The Association of Mutual Funds in India (AMFI) has put forward a number of requests for the upcoming Union Budget 2025-26, highlighting key changes that are needed to support the mutual fund industry. With mutual funds increasingly becoming an attractive investment among investors, AMFI’s proposals aim to address several tax and regulatory challenges that could impact the growth and attractiveness of mutual funds in India.

One major request is the reinstatement of long-term indexation benefits for debt mutual funds, which were withdrawn in Budget 2024. This would restore retail investor’s perceptual benefits under the devastation of inflation and boost consumer confidence in debt funds. The withdrawal has left retail investors dependent on debt funds for stable returns, with a much sharper cut in gains. Just about with inflation hovering around 5.5% and average returns from debt funds at approximately 7%, one is left with an extremely modest 1.5% real income.

AMFI has also asked for the rollback of the recent hikes in short- and long-term capital gains taxes, which it sees as a potential disincentive for mutual funds. The recently announced addition of the short-term capital gains tax from 15% to 20% and the long-term capital gains tax from 10% to 12.5% has raised alarm. They also want to restore previous STT rates for futures and options to augment profitability among retail investors in arbitrage and equity savings funds.

A key proposal is to broaden the definition of equity-oriented funds, such that it includes FoF or Fund of Funds that invest at least 90% in equity-oriented assets. This change could attract even more investors by lessening taxation burdens on FoFs.

Given the limited investment options available for retirement planning, AMFI is advocating for the introduction of pension-oriented mutual fund schemes with tax benefits similar to those offered by the National Pension Scheme (NPS) under Section 80CCD. These schemes may give a flexible yet market-linked choice for retirement planning, especially for workers in the unorganized sector.

Moreover, they further want amendments in Section 9A, which would motivate global investors to invest in India through the relaxation of the conditions for offshore funds managed by Indian portfolio managers. AMFI would also support a uniform 10% surcharge on TDS on dividends and capital gains from NRIs and easing in ELSS norms.

Additionally, they also suggest increasing the withholding tax threshold on mutual fund distributions from Rs 5,000 to Rs 50,000, meant for small investors and proposed differentiated capital gains tax rates – 10% for the 1-3 years holding period and exemption after 3 years. Debt-linked Saving Scheme- it will offer safer investment options and will help widen India’s Corporate Bond market.

Lastly, AMFI requests relief from higher TDS when an investor’s PAN becomes inoperative, simplifying compliance for both investors and fund houses.