As Finance Minister Nirmala Sitharaman prepares to present the Union Budget 2024 on July 23, various sectors are submitting their wishlists in anticipation of favorable decisions. The Association of Mutual Funds in India (Amfi) has also shared its proposals, focusing on reforms and tax benefits aimed at encouraging greater participation in mutual funds and fostering the growth of the mutual fund industry.
Amfi’s Key Proposals for Budget 2024
Amfi’s wishlist for the upcoming budget includes reforms in pension-focused mutual funds, taxation changes for debt-oriented mutual funds, and the introduction of a new Debt Linked Savings Scheme (DLSS). These proposals aim to bring parity between mutual fund schemes and other investment vehicles, streamline tax benefits, and attract more retail investors to the bond market.
1. Pension-Focused Mutual Funds
One of Amfi’s primary requests is to harmonize the tax treatment for pension-focused mutual funds, also known as Mutual Fund Linked Retirement Schemes (MFLRS), with that of the National Pension System (NPS). Currently, retirement planning in India is supported through three main avenues: the NPS, mutual fund-linked retirement or pension schemes, and insurance-linked pension plans. However, the tax treatment for these products varies, with the NPS enjoying more favorable exemptions under Section 80CCD of the Income Tax Act, 1961, while mutual fund pension schemes are covered under Section 80C only if individually notified by the Central Board of Direct Taxes (CBDT).
Amfi is urging the government to bring MFLRS under the same tax umbrella as the NPS, granting them similar tax advantages under Section 80CCD. This would make mutual fund pension schemes more attractive to investors and simplify the investment landscape for retirement planning. A uniform tax treatment for pension funds was initially proposed in the 2014-2015 budget but was not implemented, leaving the mutual fund industry disappointed.
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2. Taxation of Debt-Oriented Mutual Funds
Another significant proposal from Amfi relates to the taxation of debt-oriented mutual funds. The association has called for changes in the tax structure for capital gains on these funds, suggesting that gains on funds held for more than three years be taxed at 10% without indexation, similar to debentures. Additionally, Amfi is advocating for a reconsideration of the short-term capital gains tax on debt-oriented mutual funds with up to 35% equity exposure.
Debt-oriented mutual funds invest primarily in fixed-income instruments such as corporate and government bonds and money market securities. Amfi believes that aligning the tax treatment of debt mutual funds with that of debentures and government securities will promote retail participation in bond markets.
A key element of this proposal is amending Section 50AA of the Finance Act, 2023. Amfi seeks to restore the benefits of indexation and lower long-term capital gains tax rates for debt mutual funds held for more than three years, benefits that were removed by the introduction of Section 50AA.
3. Introduction of Debt Linked Savings Scheme (DLSS)
Amfi has also proposed the introduction of a new financial product called the Debt Linked Savings Scheme (DLSS). Modeled after the Equity Linked Savings Scheme (ELSS), which offers tax benefits under Section 80C of the Income Tax Act, DLSS would encourage long-term retail savings to be channeled into higher-rated debt instruments.
The ELSS is a popular tax-saving mutual fund with a focus on equity, but there is currently no equivalent for debt-oriented investments. By introducing DLSS, Amfi aims to deepen the bond market, providing retail investors with an alternative tax-efficient investment in debt instruments, while also contributing to the development of India’s fixed-income market.
Amfi’s proposals for Budget 2024 reflect the mutual fund industry’s desire for reforms that will make mutual funds a more attractive option for investors. By aligning tax treatment for pension-focused mutual funds with the NPS, revising the tax structure for debt-oriented mutual funds, and introducing a Debt Linked Savings Scheme, the association hopes to foster greater participation from retail investors, boost domestic savings, and deepen India’s bond market. As the industry waits for the budget, these reforms could play a key role in shaping the future of mutual fund investments in India.
