In its submission, the Association of Mutual Funds in India (Amfi) has proposed a differentiated tax structure for equity investments based on the holding period.
It has suggested that equity investments held for more than one year and up to three years should be taxed at 12.5 per cent on gains exceeding ₹2 lakh in a financial year.
At present, long-term capital gains (LTCG) on such investments is at 12.5 per cent on gains exceeding ₹1.25 lakh in a financial year. For investments held beyond three years, it has proposed exemption from capital gains tax.
As an alternative, the submission suggests exempting LTCG on units of equity-oriented mutual funds held for more than five years from income tax.
Amfi has submitted that due to the current tax structure, most investors redeem their investments after 12 or 24 months, leading to substantial capital being pulled out of the MF industry.
“In order to encourage stable long-term capital in the mutual fund industry, exemption from LTCG on units held for more than five years is recommended. This would ensure investors remain invested for longer periods,” said Amfi.
The industry body has also urged the government to roll back recent tax changes on debt MFs.
It has said the withdrawal of indexation benefits on debt schemes in recent years has dented inflows and weakened the corporate bond market.
Amfi has asked the government to restore LTCG with indexation for debt mutual funds held for more than 36 months, proposing a 12.5 per cent tax rate, or 20 per cent with indexation.
In addition, the industry has sought parity in taxation for equity-oriented fund-of-funds. It recommended amendments to the definition so that such schemes receive the same capital gains tax treatment as direct equity funds.
The industry body has submitted a list of 27 recommendations for the Union Budget, including restoring the long-term indexation benefit for debt schemes which was withdrawn in Budget 2024. It also sought introduction of a debt-linked savings scheme (DLSS) to help expand the Indian bond market.
It called for a uniform rate for deduction of surcharge on tax deducted at source (TDS) in respect of NRIs, and a separate deduction for investment in equity-linked savings schemes (ELSS), among others.
The submission also includes a set of proposals aimed at retirement savings and operational tax clarity.
These include allowing mutual funds to offer retirement-oriented schemes with tax treatment aligned to the National Pension System. It also sought a mutual fund-based voluntary retirement account, and tax neutrality for intra-scheme switches, scheme consolidations and segregated portfolios.
Further, Amfi has asked for parity in tax treatment for hiving off passive schemes from an existing mutual fund to a mutual fund lite belonging to a group entity. This is to protect investors from unexpected tax liabilities.
Under the current regulations, MFs have an option to hive off passive schemes covered under the MF Lite framework to a different group entity.
However, this could result in a switching of units between existing MF and MF Lite.
Switching of units may be considered as a ‘transfer’ under the Income Tax Act and could be liable for capital gains tax.
 "Mutual funds")