Mutual Fund Industry Presents Comprehensive Budget 2026 Wishlist for Tax Rationalization
The Association of Mutual Funds in India (AMFI) has submitted a detailed set of recommendations to the Finance Ministry ahead of the upcoming Union Budget 2026, seeking significant tax relief and structural reforms to revive the debt mutual fund category and encourage long-term retail investor participation. The industry body emphasizes that current tax policies are causing capital outflows from debt funds and deterring conservative investors who rely on fixed-income instruments for stability and income generation.
Restoring Indexation Benefits for Long-Term Capital Gains
AMFI has formally requested the restoration of long-term capital gains tax with indexation benefits for mutual fund investors. Currently, the indexation benefit has been discontinued, and all investment gains after a holding period of one year face a capital gains tax of 12.5%. This change has particularly impacted debt mutual funds, where gains are taxed at the investor's slab rate regardless of holding period, making these instruments less attractive compared to other fixed-income options.
"Debt remains a vital investment class for conservative investors who depend on it for income and relative stability, especially senior citizens. Channeling retirement savings into fixed income is key to ensuring senior citizens' and retirees' investment requirements can be suitably met," states AMFI in its budget recommendations.
Proposed Capital Gains Tax Structure
The mutual fund industry has proposed a revised capital gains tax structure to encourage longer investment horizons:
- Long-term capital gains tax of 12.5% for funds redeemed between 1-3 years
- Complete tax exemption for investments held for more than 5 years
- Increase in equity long-term capital gains exemption limit from ₹1.25 lakh to ₹2 lakh annually
"Currently due to the standard rate of tax post holding period of 12 months/24 months as the case may be, most investors redeem their investments after the said period," mentions one of AMFI's 27 budget suggestions.
Addressing Tax Disparities and Operational Challenges
The industry has highlighted several tax disparities that need urgent attention. Unlike Unit-Linked Insurance Plans (ULIPs), where switches between funds are tax-exempt, mutual fund investors face capital gains tax when switching between schemes or rebalancing portfolios. This creates an uneven playing field between similar investment products.
"There shouldn't be capital tax on intra-scheme switches as well as switches effected to rebalance the portfolio within funds considered as equity funds for taxation purpose," says Hemant Rustagi of mutual fund distribution firm Wiseinvest.
Additionally, the industry has requested tax exemption for involuntary switches when schemes are wound up due to fewer investors or category obsolescence, as investors are forced to move to other funds without choice.
Introducing New Savings Instruments
To boost fixed-income investments, AMFI has proposed introducing a fresh Debt-Linked Savings Scheme (DLSS) with a 5-year lock-in period and separate deduction benefits beyond the existing Section 80C limit. This would provide retail investors with additional tax-saving options while building their fixed-income portfolios.
The association has also suggested creating a Mutual Fund Managed Voluntary Retirement Scheme (MF-VRA) that would invest according to an individual's lifecycle and could be linked to employer-associated retirement benefits. "Additional tax deductions or exemptions can be considered to incentivize individuals to contribute to their MF-VRA accounts," suggests AMFI.
Rebate for Middle-Class Investors
AMFI has pointed out that salaried middle-class individuals earning less than ₹12 lakh often end up paying 12.5-20% tax despite falling below the income threshold, as they are denied the ₹60,000 income tax rebate due to special income from capital gains. The industry body recommends offering this rebate to taxpayers whose total income (including capital gains) does not exceed ₹12 lakh, ensuring equitable treatment across income sources.
"Simplifying the tax treatment across different asset classes will reduce the 'tax complexity' that often scares away small-town investors," says Madhu Lunawat, Founder, MD and CEO of The Wealth Company Mutual Fund.
International Investment Window Expansion
The mutual fund industry has highlighted the frequent pausing of investments into international stock market funds due to exhaustion of the $7 billion investment window limit set by the Reserve Bank of India. This forces investors to resort to direct investment routes that may be riskier for retail participants.
"When Indian global mutual funds stop accepting fresh investments after nearing the industry-wide overseas investment cap, investors resort to the direct investment route, which could be risky for retail investors. Hence, an expansion of the overall overseas investment window should be considered to help individuals diversify geographical risk," says Aditya Agarwal, Co-Founder of wealth management platform Wealthy.in.
Technical and Operational Reforms
The industry has identified several technical issues that need resolution:
- Allowing investments in Equity Linked Savings Schemes (ELSS) of any amount subject to a minimum of ₹500, rather than restricting to multiples of ₹500
- Standardizing surcharge rates for Non-Resident Indians (NRIs) at 10% on TDS for dividends and capital gains from redemptions
- Capping surcharge at 15% when mutual funds distribute income to bring parity with corporate dividends
- Increasing the TDS threshold for income distribution from ₹10,000 to ₹50,000 to reduce hardship for lower-income investors
Securities Transaction Tax Relief
AMFI has requested relief from Securities Transaction Tax (STT) to avoid double taxation for retail investors. "Investors have to pay STT on the transaction value and again need to pay capital gains tax on the gain realized on the sale transaction, which acts as a barrier for a new investor to invest in mutual funds," states the association.
The increased STT on futures and options has also adversely impacted arbitrage funds, which investors use to hedge risk. "The available arbitrage has now been reduced due to an increase in short term capital gain tax. Further, the increased STT on futures will add to the cost of these funds," notes the industry body.
Industry experts agree that these comprehensive tax rationalization measures would revive the safer investment category of debt funds compared to higher-risk equity assets, while encouraging broader retail participation in India's mutual fund ecosystem.
