Union Budget 2025: Expectations from Asset Management Companies (MFs)
he Union Budget 2025 will be presented on 1st February. The mutual fund industry is hopeful for reforms that will boost investor confidence and participation. The Association of Mutual Funds in India (AMFI) has put forth several proposals aimed at making mutual fund investments more attractive and equitable. Let us explore the key expectations of the mutual fund industry from the upcoming budget.
Restoration of Indexation Benefits for Debt Funds
In the previous budget, the government removed indexation benefits for debt mutual funds, which had allowed investors to adjust the purchase price of their investments for inflation when calculating capital gains. This change led to higher tax liabilities for many investors in debt funds. The mutual fund industry is now urging the government to reinstate these benefits, arguing that their removal has made debt funds less appealing compared to other fixed-income instruments. Restoring indexation would provide a level playing field and encourage long-term investments in debt funds.
Introduction of Debt-Linked Savings Schemes (DLSS)
To further promote investments in the debt market, AMFI has proposed the introduction of Debt-Linked Savings Schemes (DLSS). Similar to Equity-Linked Savings Schemes (ELSS), DLSS would offer tax deductions under Section 80C of the Income Tax Act, thereby incentivising retail investors to participate in the debt market. This initiative aims to deepen the bond market and provide investors with more diversified tax-saving investment options.
Reduction in Capital Gains Tax Rates
The mutual fund industry is advocating for a rollback of the increased tax rates on capital gains introduced in the previous budget. Currently, short-term capital gains are taxed at 20%, up from the earlier 15%, and long-term gains at 12.5%, up from 10%. The industry argues that these higher rates discourage retail investors from investing in mutual funds. A reduction in these rates could make mutual fund investments more attractive, encouraging greater participation from retail investors.
Inclusion of Fund of Funds (FoFs) in Equity-Oriented Category
Fund of Funds (FoFs) are mutual funds that invest in other funds rather than directly in securities. Currently, many equity-invested FoFs are not classified as equity-oriented funds, resulting in higher taxation compared to direct equity or equity-oriented funds. AMFI proposes that FoFs allocating at least 90% of their investments in equity-oriented funds should be included in the equity-oriented category. This reclassification would ensure uniform tax treatment and potentially attract more investors to FoFs.
Uniform Surcharge Rate on TDS for NRIs
The industry has also highlighted the need for a uniform surcharge rate of 10% on Tax Deducted at Source (TDS) for Non-Resident Indians (NRIs) on dividend payments from mutual fund units. Currently, varying surcharge rates can lead to complexities and higher tax liabilities for NRIs. A uniform rate would simplify the tax structure and make mutual fund investments more appealing to NRI investors.
Level Playing Field in Input Tax Credit
AMFI has pointed out a disparity in the treatment of input tax credit between fixed deposits and mutual funds. Currently, interest on fixed deposits benefits from non-reversal of input tax credit, a benefit not extended to mutual funds. The industry recommends that gains from mutual fund investments should receive similar treatment to ensure a level playing field among various investment options.
The mutual fund industry's proposals for the Union Budget 2025 focus on tax reforms and the introduction of new investment schemes aimed at enhancing investor participation and confidence. By restoring indexation benefits for debt funds, introducing DLSS, reducing capital gains tax rates, reclassifying certain FoFs, implementing a uniform surcharge rate for NRIs, and ensuring equitable treatment in input tax credit, the government can create a more favourable environment for mutual fund investments. Stakeholders are optimistic that these recommendations will be considered, paving the way for a more robust and inclusive financial market in India. m.Stock will keep you updated on related developments to help you optimise your mutual fund portfolio and associated taxes.
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