The mutual fund industry in India has recently made some key requests to the government in order to boost investor confidence and support the growth of the debt market. One of the major requests is to restore the indexation benefit on all long-term capital gains from debt funds. Indexation benefit helps to adjust capital gains for inflation, and its removal has had a significant impact on debt fund investors.
Before the Budget of 2023, investments in debt funds held for over 3 years were allowed to avail indexation benefit. However, last July, the Budget removed this benefit retrospectively for all old long-term investments in debt funds made before March 2023. This move has hurt both new and old investors in debt funds, as they are now taxed at marginal rates without the benefit of indexation.
The industry has also requested that capital gains on redemption of debt fund units held for over one year should be taxed at a rate of 12.5%, similar to listed bonds. Currently, debt mutual funds are considered short-term capital assets regardless of the holding period and are taxed at applicable rates, while listed bonds held for over 12 months are taxed at a lower long-term rate of 12.5%.
Furthermore, the mutual fund industry has urged the government to restore the short-term capital gains tax to 15% from 20% and the long-term capital gains tax to 10% from 12.5%. These increases in tax rates have significantly raised the tax liability for investors.
In addition to these requests, the industry is also seeking the Finance Ministry’s approval to allow all mutual funds to launch pension-oriented schemes with similar tax benefits as available for the National Pension System (NPS). Currently, only a few mutual fund retirement benefit/pension schemes have been notified by the Central Board of Direct Taxes (CBDT) for tax benefits under Section 80C.
Overall, these requests aim to provide a much-needed boost to the debt market, enhance investor confidence, and encourage long-term investments in mutual funds. By restoring indexation benefits and addressing tax issues, the government can support the growth of the mutual fund industry and benefit both investors and the economy.
