Currently, debt mutual funds are considered as short-term capital asset irrespective of holding period and are taxed at applicable rates.
The mutual fund industry expects the Union Budget for 2025-26 to bring back the long-term taxation benefit for debt schemes that was withdrawn last year.
According to industry experts, revisiting the withdrawal of indexation on long-term debt investments and taxing capital gains on redemption of debt mutual funds held for more than one year at the rate of 12.5 percent are key demands of the mutual fund industry.
Prior to Budget 2023, investments in debt funds held for a period for more than three years were allowed to avail indexation benefit to mitigate the effect of inflation on capital gains.
In July, the indexation benefit was also withdrawn retrospectively for all old long-term investments in debt funds made even up to March 31, 2023.
The Finance Act, 2023 said that debt funds should be deemed as short-term capital gains, irrespective of period of holding and the same will be taxable at the applicable rates.
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“One of the major expectations is the restoration of indexation benefits for debt funds, which was revoked last year. This would enhance their attractiveness for retail investors and encourage long-term participation in fixed-income markets which has seen a dip in participants in the last one year,” said Feroze Azeez, deputy CEO at Anand Rathi Wealth Limited.
According to Deepak Agrawal, chief investment officer for Debt at Kotak Mahindra Asset Management Company (AMC), while there is some anticipation regarding potential tax reliefs for debt mutual funds, such measures, though highly favourable, are not widely expected.
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“The recent changes in taxation have already impacted this sector, and any further relief would be advantageous but remains speculative,” Agrawal said.
Debt mutual funds are considered as short-term capital asset irrespective of holding period and are taxed at applicable rates.
When it comes to other demands from the mutual fund industry, Jimmy Patel, managing director and chief executive officer at Quantum AMC, hopes that the budget 2025 would bring down either capital gains tax or Securities Taxation Tax (STT).
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“Other demands include allowing mutual funds to launch pension-oriented funds, allow equity-oriented funds to include fund of funds investing in equity-oriented funds,” said Patel.
The industry is also looking at tax parity with the National Pension System (NPS), allowing mutual funds to offer retirement-focused products with similar tax advantages. This move will encourage more investors to participate in these products.
Rajani Tandale, senior vice-president for mutual funds at 1 Finance, believes that the Budget should abolish capital gains taxes for switches from regular to direct plans to promote cost efficiency and maximise returns.
“Also, provide tax-free growth on equity mutual funds held for over seven years to incentivise patient investing and reduce portfolio churning,” said Tandale.
Venkat Chalasani, chief executive of AMFI, anticipates that the upcoming Budget would prioritise investor confidence and deepen the participation in mutual funds by addressing key tax-related concerns.
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“Restoring indexation benefits for debt funds and rationalising the capital gains tax regime, as well as the introduction of a debt-linked savings scheme, can significantly bolster long-term savings and develop the Indian bond market,” Chalasani said.