Mutual Fund Industry seeks Tax Relief from Upcoming Budget 2025
The Mutual Fund industry has presented a comprehensive wishlist to the government ahead of Budget 2025, focusing on tax relief for debt schemes and a rollback of recent increases in equity taxation. The measures, the industry argues, are essential for sustaining investor confidence and promoting broader participation in capital markets.
In April 2023, the government eliminated the indexation benefit for debt mutual fund schemes, subjecting gains to taxation based on the investor’s income slab regardless of the holding period. Subsequent changes in Budget 2024 extended these taxation rules retroactively, removing the indexation benefit for investments made before April 2023. The MF industry has expressed concerns that these retrospective measures may deter both new and existing investors from investing in capital markets.
The industry body has suggested that the taxation of debt mutual funds be brought at par with listed bonds. The industry has made a case for capital gains from debt-oriented mutual funds to be taxed at a flat rate of 12.5%, as in the case of listed bonds.
The mutual fund industry has also sought a revocation of the higher equity mutual fund tax rates instituted in Budget 2024. The STCG, or short-term capital gain tax, on equities was increased from 15% to 20%, and the LTCG, or long-term capital gain tax, was also increased from 10% to 12.5%. The industry emphasised that these higher tax rates would hamper the financialisation of savings and also discourage investment in equity markets. Another major demand is a cut in the securities transaction tax (STT), which was increased in the previous budget. The industry pointed out that this increase disproportionately affects arbitrage and equity savings funds, whose strategies are based on hedging through futures and options.
Changes in the tax treatment of fund-of-funds, or FoFs, investing in equity-oriented funds have also been pressed for by the industry.
The current framework subjects FoFs to the equity taxation conditions of investment of at least 90% of the corpus in equity schemes and ensures that the underlying schemes, too, allocate a minimum of 90% to domestic equities. The industry noted that many FoFs fail to meet the second condition because equity schemes have the flexibility to allocate between 65% and 100% to equities, which creates a regulatory hurdle. Moreover, the industry recommends pension-oriented schemes by mutual funds, where tax advantages offered to investments under the NPS could be drawn in parallel. Currently, retirement mutual fund schemes, among others, do not offer similar benefits since exemption under Section 80CCD applies only for investment under NPS. Uniform tax treatment for post-retirement investment avenues should further improve their attractiveness, allowing more savings for retirement over long-term periods, claims the industry. As the government is ready to unveil Budget 2025, the mutual fund industry will hope that some of these proposals are taken on board to create a more investor-friendly regulatory environment.
