Over the last two Union Budgets, the taxation framework for mutual funds and capital market investments has seen multiple changes. In Union Budget 2024, presented in July after the Modi government returned to power for a third term, the government revised rules around capital gains tax, indexation benefits on debt mutual funds, securities transaction tax (STT) and taxation of certain investment structures. These followed earlier changes in 2023 that removed long-term capital gains with indexation for most debt mutual funds.
As a result, investors—especially those investing for the long term—have become far more sensitive to post-tax returns. Against this backdrop, the Association of Mutual Funds in India (AMFI) has submitted a detailed pre-Budget wishlist ahead of Union Budget 2026, seeking to restore tax efficiency and revive long-term mutual fund investing.
According to Swapnil Aggarwal, AMFI’s proposals are aimed at correcting distortions that have crept into the tax system in recent years.
“The budget expectations of AMFI are intended to remove tax inefficiencies and improve mutual funds as a long-term investment option. Suggestions such as the restoration of indexation benefits for debt funds, tax equality for ReITs/InvITs, and the taxation of capital gains would improve after-tax returns.”
Aggarwal adds that these demands are especially relevant in the current environment.
“These are particularly relevant in the current scenario where investors are becoming increasingly tax-sensitive.”
Debt mutual funds: Push to bring back indexation
One of AMFI’s key demands relates to debt mutual funds, which lost their long-term capital gains (LTCG) status with indexation in 2023. Currently, most gains from debt funds are taxed at the investor’s slab rate, irrespective of the holding period.
AMFI has proposed restoring LTCG with indexation for debt mutual funds held for more than 36 months, with a tax rate of 12.5% (or 20% with indexation). The industry believes this would make debt funds more competitive compared to traditional fixed-income products.
New debt-linked savings scheme outside Section 80C
AMFI has also flagged the absence of a dedicated tax-saving option for long-term debt investors. Section 80C, it argues, is already crowded and largely tilted towards equity and provident fund products.
To address this, AMFI has proposed a Debt Linked Savings Scheme (DLSS) with a five-year lock-in, at least 80% allocation to high-quality debt, and a separate tax deduction outside Section 80C.
Equity capital gains tax: Higher exemption sought
On the equity side, AMFI has called for changes to LTCG taxation on equity mutual funds. At present, LTCG is taxed at 12.5%, with an exemption limited to ₹1.25 lakh per financial year.
AMFI has proposed raising the tax-free LTCG limit to ₹2 lakh, and also suggested exempting LTCG on equity mutual funds held for more than five years, to encourage genuine long-term investing.
Equity FoFs and ELSS: Rationalising tax treatment
AMFI has highlighted anomalies in the taxation of equity Fund-of-Funds (FoFs), which are currently taxed as non-equity funds even if they invest primarily in equity mutual funds. It has proposed treating FoFs that invest 90% or more in equity-oriented schemes as equity funds, along with legal clarity to allow FoFs to invest in multiple equity schemes.
For ELSS, AMFI has suggested allowing investments in any amount (subject to a minimum) instead of multiples of ₹500, and providing a separate tax deduction for ELSS under the new tax regime, where currently no such benefit exists.
Retirement-focused mutual fund products gain prominence
Beyond taxation, AMFI’s wishlist places strong emphasis on retirement planning through mutual funds. At present, tax incentives for retirement savings are largely limited to EPF and NPS, leaving mutual funds without a dedicated, tax-efficient retirement product.
“The emphasis on retirement-focused solutions like pension-style mutual fund schemes, a voluntary retirement account, and a debt-linked savings scheme indicates a move towards securing financial futures and practicing prudent investment behavior.”
AMFI has proposed allowing pension-oriented mutual fund schemes with NPS-like tax benefits, introducing Mutual Fund Linked Retirement Schemes (MFLRS) with EEE tax treatment, and creating a voluntary MF retirement account, similar to US-style 401(k) plans.
Aggarwal believes these steps could redirect household savings into financial assets.
“If the measures are adopted, they are likely to increase participation and direct household savings into productive channels, lessening reliance on conventional physical investments.”
Operational reforms: Capital gains, STT and switching rules
From a market efficiency standpoint, AMFI has flagged several operational issues. These include capital gains tax on intra-scheme switches—such as moving between growth and IDCW options or direct and regular plans—even when the underlying portfolio remains unchanged.
AMFI has proposed exempting such switches from capital gains tax. It has also suggested raising the TDS threshold on mutual fund dividends from ₹10,000 to ₹50,000 annually, and prescribing a flat 10% surcharge on TDS for NRIs to avoid over-deduction.
“From a market point of view, simplification of capital gains tax, STT, and procedural issues related to scheme switching and consolidation would help in improving liquidity and efficiency in the market.”
Summing up AMFI’s broader objective, Aggarwal says:
“On the whole, the proposals made by AMFI are aimed at aligning taxation with long-term investment, and it would be beneficial if these are partially accepted in the Budget.”
As Nirmala Sitharaman prepares to present Union Budget 2026 in the Lok Sabha on February 1, the mutual fund industry and retail investors will be closely watching whether the government revisits recent tax changes—or continues prioritising simplification with fewer investment-linked incentives.