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Here are a few important points made by AMFI in its proposal to the union ministry:
1. Request to restore the long-term indexation benefit for debt schemes of mutual funds which was withdrawn in the Budget 2024
AMFI has requested to restore long‑term capital gains (LTCG) with indexation for Debt Mutual Funds held > 36 months by amending Sections 2, 48, 50AA and 112 of the Act (Section 2, 72, 76 and 197 of the Bill). Tax rate: 12.5% (or 20% with indexation)
Debt remains a vital investment class for conservative investors who depend on it for income and relative stability eg. senior citizens. Channelling Retirement savings into fixed income is key to ensure senior citizens’ and retirees’ investment requirements can be suitably met.
Similarly, a vibrant and growing debt market gives corporations and the government increased funding flexibility and efficiently utilizes India’s deep savings pool. This in turn will promote the increased financialization of India’s savings and support the country’s long-term growth. Rationalization of tax treatment for Debt Mutual Funds can help accelerate the development of the corporate bond market.
2. Request to provide a separate deduction for investment in ELSS under new regime
AMFI has requested to provide a separate deduction (on the lines of Section 80CCD(1B) of the Act (Section 124 of the Bill)) exclusively for ELSS investments under the new tax regime, with a notified cap. This will preserve ELSS as a simple, low‑ticket equity entry vehicle; sustains retail participation in equities.
3. Request to amend the definition of Equity Oriented Funds to include Fund of Funds investing in Equity Oriented Funds
The proposal by AMFI said that it is requested that the definition of “Equity Oriented Funds” be revised to include investment in Fund of Funds schemes which invests a minimum of 90% of the corpus in units of Equity Oriented Mutual Fund Schemes, which in turn invest minimum 65% in equity shares of domestic companies listed on a recognised stock exchange.
While an equity-oriented fund includes a fund investing a minimum of 65% per cent of its total proceeds in the equity shares of domestic companies. Consequently, despite a FoF investing in equity securities of domestic companies via Equity Oriented Funds, they do not get the same tax treatment as applicable to equity-oriented funds.
It is requested that the words “another fund” provided in the Explanation (a) to section 112A of the Income Tax Act (Section 198 of the Bill) should be replaced with the words “other funds ” retrospectively.
It is expedient for CBDT to clarify that an equity oriented “Fund of Funds” may invest in more than one equity oriented fund schemes (rather than “another fund”) to avoid any ambiguity.
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4. Request to restore the earlier tax rates on Capital Gains
AMFI has requested that for mutual funds as an investor, the STT on Futures and Options should be reinstated to the earlier rates.
Arbitrage Funds and Equity Savings Funds mainly use Futures and Options for hedging as the underlying assets. The available arbitrage has now been reduced due to increase in short term capital gain tax. Further, the increased STT on futures will add to the cost of these funds.
5. Proposal to provide treatment for mutual funds investing in ReITs and InvITs similar the equity oriented mutual funds
According to the proposal, a mutual fund that has a minimum of 65% in ReITs or InvITs to be brought on par with the tax treatment as equity-oriented funds.
ReITs and InvITs have the potential to provide significant amounts of stable long-term capital to fund the strategically important real estate and infrastructure sectors. An efficient tax structure can boost demand for the aforementioned instruments across a wide range of investors and efficiently channelize capital into future large-scale projects which are vital for the country’s development.
Furthermore, by investing in suitable Mutual Funds, investors can get access to ReITs and InvITs in a professionally managed manner.
6. All Mutual Funds should be allowed to launch pension-oriented MF schemes (MFLRS) with Uniform Tax Treatment as NPS
The proposal by AMFI notifies that a Mutual Fund Linked Retirement Scheme (MFLRS) with EEE tax treatment. Permit employee and employer contributions with deductions under a new/parallel provision akin to Section 80CCD of the Act (section 124 of the Bill), with notified caps; specify vesting and withdrawal rules tailored to retirement.
Currently tax benefits are only provided to investments made to the National Pension System (NPS). Hence, in order to boost and reward taxpayer savings, this would be a welcome move from the government.
The other key proposals include submitted by AMFI includes –
- Request to introduce Debt Linked Savings Scheme (DLSS) to help expand the Indian Bond Market
- Request for amendment to ELSS Rule 3A to permit any amount to be invested in the scheme, instead of in multiples of Rs 500
- Taxability of long-term capital gains under section 112A of the Act (Section 198 of the Bill)
- Introduction of a Mutual Fund – Voluntary Retirement Account (‘MF-VRA’) which (similar to a 401(k) plan in the US)
- Request for parity in tax treatment in respect of Intra-scheme Switching of Units under MF Schemes
- Need to provide tax parity for consolidation of Options of Schemes similar consolidation of Scheme and Plan
- Request to prescribe a uniform rate for deduction of Surcharge on TDS in respect of NRIs
- Increase in threshold limit of withholding tax (TDS) on Income distribution by Mutual Fund scheme
- Parity in tax treatment in respect of hiving off passive schemes from an existing mutual fund to a mutual fund Lite belonging to a group entity
- Mutual Fund Units should be notified as ‘Specified Long-Term Assets’ qualifying for exemption on LTCG under Sec. 54 EC
- Rebate under section 87A of the Act (section 156 of the Bill) should be extended to income taxable under special rates (such as i.e. section 111A, 112 or 112A of the Act)
- Request for relaxation to the mutual funds in case of deduction of TDS for inoperative PAN cases
- Issue in provisions of section 194R to be applied in case write-off of receivable from the investor/ creditors
- Requirement of Form 15CA & 15CB for payment to Non-resident
- Capital Gain Taxation in case of involuntary redemption of mutual fund units in winding up of scheme scenarios.
- Segregation of Mutual Fund Scheme should not be considered as transfer as per Section 47 of the Act (Section 70 of the Bill)
- Including “Mutual Fund” in the drop down list of ‘Sub Status’ in Part A of the Income Tax Return
- Removal of Securities Transaction Tax (STT) on purchase or sale transactions undertaken in financial markets including units of mutual fund
- Proposal to provide treatment for mutual funds investing in ReITs and InvITs similar the equity oriented mutual funds
- Capping of surcharge rate on income distribution by mutual funds – at par with dividend distribution
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