Finance Minister Nirmala Sitharaman is scheduled to unveil the Union Budget 2024 on July 23. Various industries are submitting their wishlists, hoping for favorable outcomes. The Association of Mutual Funds in India (AMFI) is no exception, having produced a document outlining ideas.
Budget 2024 Wishlist
Some of AMFI's recommendations include:
Mutual funds that focus on pensions
One of Amfi's key goals is to align the tax benefits for pension-focused mutual fund schemes, also known as Mutual Fund Linked Retirement Schemes (MFLRS), with those of the National Pension System (NPS).
Amfi advocates that the tax treatment of NPS and retirement/pension-oriented programs introduced by mutual funds be harmonized by incorporating them under Section 80CCD of the Income Tax Act of 1961. This modification would provide them the same tax benefits as the NPS.
Current tax treatment concerns
In India, three key investment routes promote retirement planning: NPS, mutual fund retirement or pension programs, and insurance-linked pension plans. The tax treatment of these products differs, with NPS receiving favorable exemptions under Section 80CCD, whilst mutual fund pension schemes are eligible for tax benefits under Section 80C only if individually notified by the Central Board of Direct Taxes (CBDT). Due to the lengthy process, only a few mutual fund pension schemes are eligible for tax benefits.
The 'Key Features of Budget 2014-2015' included a suggestion for "uniform tax treatment for pension funds and mutual fund linked retirement plans". However, this promise was not fulfilled in the Finance Bill, which disappointed the mutual fund sector.
Taxation on debt-oriented mutual funds
Amfi has also proposed modifications to the taxation of debt-oriented mutual funds. They propose that capital gains from these funds held for more than three years be taxed at a 10% rate without indexation, similar to debentures. They also want the government to review the short-term capital gains tax levied on debt-oriented mutual funds with up to 35% equity exposure.
What is the definition of debt-oriented mutual funds?
A debt fund is a mutual fund scheme that invests in fixed income instruments, such as corporate and government bonds, corporate debt securities, and money market instruments, with the goal of increasing capital. Debt funds are sometimes known as income funds or bond funds.
Amendment to Section 50AA
The industry body suggests revising Section 50AA of the Finance Act of 2023. This reform is intended to encourage retail investor engagement in bond markets through debt funds by harmonizing their tax status with debentures and government securities. Capital gains on these securities are now taxed at 10% without indexation for holding periods of more than three years, with listed debentures having a shorter holding period of twelve months. Amfi seeks to reinstate indexation benefits and lower long-term capital gains tax rates for mutual fund schemes held for more than three years, which were eliminated under Section 50AA.
Introduction of Debt-Linked Savings Scheme (DLSS)
Amfi has suggested a new 'Debt Linked Savings Scheme' (DLSS), which is comparable to the Equity Linked Savings Scheme. This program will route individual investors' long-term savings into higher credit-rated debt instruments with suitable tax incentives, so deepening the bond market.
What is an ELSS fund?
An ELSS fund, or Equity-Linked Savings Scheme, is the only type of mutual fund eligible for tax breaks under Section 80C of the Income Tax Act of 1961. Investing in ELSS mutual funds allows you to receive a tax credit of up to Rs 1,50,000 and save up to Rs 46,800 per year. The majority of ELSS mutual funds' assets (65% of the portfolio) are allocated to equities and equity-linked securities such as listed shares. They may also have exposure to fixed-income securities. These funds have a three-year lock-in period, the shortest of all Section 80C investments.
